The British government will announce a banking overhaul this week which it hopes will attract new players to the market, as carve-up plans for rescued banks Royal Bank of Scotland and Lloyds are finalised.
British Finance Minister Alistair Darling said today he expected "perhaps three new entrants" would emerge from a process that will see the country's largest retail lenders selling off assets, including a string of high street bank branches, and shrinking back their balance sheets.
"What I want to do now is begin the process of reform and reconstruction so we have got a safer, more competitive banking system with more high street banks than we have at the moment, with new entrants coming in," Mr Darling told BBC television.
Mr Darling, who has frequently spoken of the need for greater competition among UK retail lenders, stopped short of confirming expectations he will block existing players in the UK market - including the acquisitive Santander – from buying the assets.
Part-nationalised RBS and Lloyds Banking Group, 43 per cent state-owned, have been under scrutiny for months by EU competition regulators investigating the impact of billions of pounds received in state aid. The banks are also negotiating with the government over a major insurance scheme for bad debts.
Both banks are set to detail a final deal with the government this week, including asset sales to ease EU concerns, sources close to the matter have told Reuters.
RBS, which is set to secure flexibility but to remain in the so-called Asset Protection Scheme, is expected be told to sell its insurance arm - with top brands Direct Line and Churchill - and RBS-branded branches in England and Wales.
Lloyds, which hopes to avoid the APS with a rights issue and other measures, is close to a deal with the government and Brussels under which it would sell Lloyds TSB Scotland, its Cheltenham & Gloucester branch network, and internet banking unit Intelligent Finance, sources said.