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Britain's top retail banks set for shake-up

Britain is set to announce on Tuesday a long-awaited deal with its bailed-out banks, including a record rights issue for Lloyds Banking Group and hefty disposals for Royal Bank of Scotland to appease the EU competition regulator and boost competition.

Part-nationalized RBS and Lloyds, 43% state-owned, have for months been under the scrutiny of the European Commission, investigating the impact on competition of the billions of pounds received in state aid.

In an attempt to minimize further state aid which would require even bigger disposals to satisfy the Commission, the banks have also been negotiating with the UK government over its Asset Protection Scheme (APS) to insure their riskier loans.

Both lenders are set to detail a final deal with the state on Tuesday in a complex package that will include disposals to satisfy the EU, sources close to the matter have told Reuters.

RBS said it will make an announcement on Tuesday on the key terms of entry into the APS and other aid it will receive from the government.

RBS and Lloyds signed up earlier this year to join the Asset Protection Scheme but a better than feared economic backdrop, the costs of participating and the concerns of the EU competition regulator have prompted both to reconsider.

Lloyds is now set to get regulatory clearance to escape the APS altogether, instead plugging a capital hole of more than 20 billion pounds by raising cash in what is expected to be the biggest ever rights issue totaling more than 12 billion pounds ($19.6 billion) and converting some existing debt into so-called contingent capital which becomes equity in any future crisis.

RBS, 70-% state-owned, does not aim to avoid the APS entirely but under revised terms is expected to be allowed to avoid an upfront fee agreed in March of up to 17.5 billion pounds ($29 billion) to join the APS for five years.

Instead the bank will pay annually, under a “pay-as-you-go” arrangement whereby the premium depends on the toxic assets needing to be insured, sources close to the deal said.

Under the terms of the original deal RBS also is set to issue 19.5 billion pounds in “B” - non-voting - shares to the government, taking the state's economic stake in the bank to 82 %, though its voting stake is capped. (Reuters)