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New EU laws may see RBS and Lloyds broken up

Both RBS and Lloyds Banking Group have sent proposals to the European Commission that could see the banks restructured and reduced to fit with new laws.

On Wednesday, the EU Commission released new rules with regard to European banks that have been bailed out by their governments. It demands that all banks submit plans for reprivatisation as well as proof that the state aid has not created a false competitive advantage.

The rules say: “Criteria has been established to delineate the conditions under which a bank may need to be subject to more substantial restructuring and when measures are needed to cater for distortions of competition resulting from aid.”

The EU is also demanding that the bailed out banks stress test their assets so as to prove long-term viability of the businesses.

Today’s reports suggest this may mean that the part-nationalised UK banks may have to wind down or even sell parts of their business. RBS has already signalled that it is looking to sell its Asian arm, and Lloyds may have to sell or wind down some of the assets bought from HBOS.

Last month, at the British Bankers Association conference in the City of London, European competition commissioner Neelie Kroes said: “The need for competitive market structures is stronger than ever; the likelihood of significant divestments by RBS and Lloyds is strong.”

The new rules also demand that the sale of a fully nationalised institution must not distort market competition through a merger. This may hinder the Government’s plans to sell Northern Rock to an existing UK bank or building society and may favour potential reported interest from both Virgin and Tesco.

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