Day of reckoning for saved banks

Plans to break up Royal Bank of Scotland and Lloyds are to be revealed

The UK banks saved by the taxpayer are facing a day of reckoning, with plans to break up Royal Bank of Scotland and Lloyds Banking Group set to be revealed.

The duo are under orders from the European Commission to sell off parts of their business to safeguard competition concerns as the price of State support.

The Government hopes the sales - as well as the break-up of Northern Rock into 'good' and 'bad' banks confirmed last week - will tempt new entrants and create three new UK players to raise competition as the sector gradually recovers from last year's crisis.

RBS - which is 70% owned by the taxpayer - could have to sell branches in England and Wales, its Churchill and Direct Line insurance arm and parts of its Global Banking and Markets investment banking business. Lloyds is likely to have to offload its Cheltenham & Gloucester branches, its Intelligent Finance online business and Lloyds TSB branches in Scotland.

The bank, which is 43.5% owned by the State, is also set to unveil a £21 billion fundraising - including a reported £13.5 billion rights issue - to avoid a taxpayer-backed insurance scheme for toxic debts. The bank wants to stay out of the Asset Protection Scheme (APS) to prevent the Government stake rising higher, but it said last week that the restructuring would not have a "material impact" on the business.

It is still likely to have to pay the Government a reported £2.5 billion for the implicit guarantee provided by the State since March, although the Treasury will in turn pay out around £6 billion to support the rights issue.

RBS is expected to place around £280 billion in bad loans into the APS - taking the Government's stake to 84% - and said that the amount of disposals required will be bigger than "initially contemplated". The Treasury could pump in £20 billion extra into the bank in return for the shares.

The bank, which was crippled by its takeover of Dutch rival ABN Amro, made UK record losses of £24.1 billion in 2008.