Lloyds: selling more assets 'equal to HBOS demerger'

FORCING Lloyds Banking Group to sell off more than the 630 branches required under European law would effectively amount to a demerger of the Lloyds TSB and HBOS deal, the banking giant has claimed.

In a submission published yesterday to the Independent Commission on Banking's (ICB) interim report, Lloyds mounted a robust defence against pressures to dispose of more assets.

It warned that such a ruling would be "disproportionate and discriminatory" as the divested business of 630 outlets will eventually have a balance sheet "in line with most other retails banks" and a branch network that is "similar in size to the Halifax".

If the ICB were to press ahead with plans to significantly enhance the sell-off - which has been codenamed "project verde" - Lloyds said this could "potentially have the effect of amounting to a reversal of the merger clearance". It pointed out that this outcome had been ruled out by the ICB and the Treasury select committee as inappropriate.

Lloyds stressed that "structural remedies" involving the divestment of businesses were "extremely rare", adding: "Indeed, in only one market investigation under the Enterprise Act has the Competition Commission seen fit to impose structural remedies, and in that case the relevant market shares were much higher than any retail or SME banking services." It was referring to the forced sale of airports by operator BAA.

The 170-plus submissions to the ICB's report, published yesterday, revealed a conflict of views between many of Britain's leading banking chiefs over the ring-fencing of bank operations.

Ring-fencing was the cornerstone proposal of the ICB's interim report and Chancellor George Osborne has signalled that he will press ahead with it. But the details have yet to be thrashed out.

Lloyds argues that any ring-fence should include "all credit supply", even funding facilities for the largest companies. "A narrowly-defined ring-fence that separates retail funding sources from the uses of those funds (outside the fence] increases the reliance of both subsidiaries on wholesale markets," Lloyds said.

However, Royal Bank of Scotland - whose chief executive Stephen Hester has concerns over the ICB's ring-fencing proposal - said in its submission that the "next best option" would be a "narrowly-defined ring-fence including only retail and SME customers".

But the bank insisted: "We see ring-fencing as tending to make UK banks riskier in the eyes of creditors and rating agencies. At the same time, we expect significant economic costs affecting customers, shareholders, the government and the economy."Barclays was "sceptical" about the "net contribution" of ring-fencing to the stability of the UK's banking industry, warning: "We are concerned that this structural measure, especially if enacted in the UK alone, will have detrimental unintended consequences for customers, financial stability, competition and the economy."

The Asia-focused bank Standard Chartered has similarly signalled that the ICB's proposals would make UK lenders more vulnerable than foreign competitors and would come at an additional cost to the British economy, adding the proposed reforms "would not address the causes of the crisis".

The ICB will publish its final report on 12 September.