Bonus ban and sell-offs forced on UK banks in return for £30bn bailout

Bonus ban and sell-offs forced on UK banks in return for £30bn bailout

Taxpayers are to put another £30bn into Lloyds Banking Group and Royal Bank of Scotland, the Treasury confirmed today, in a major announcement that could herald a shakeup of the banking industry.

While the two banks are being forced to sell off parts of their businesses in return for the state aid under rules imposed by Brussels, the government has also extracted new commitments from the banks.

The Treasury said that the banks had committed not to pay cash bonuses for the 2009 financial year to any staff earning more than £39,000 a year and that members of the boards would defer all their bonuses payments for 2009 until 2012.

The move is intended to ensure that their "remuneration is better aligned with the long-term performance for their banks" and come ahead of an appearance by Sir David Walker, who is reviewing City pay and practices, before the Treasury select committee later today.

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The announcements follow intense negotiations between the two banks and the government over the asset protection scheme, intended to insure the two bank's most troublesome assets. Lloyds has now managed to convince the government that no longer needs the insurance and will embark on a £21bn fundraising exercise, some £13.5bn of which will come from one of the biggest cash calls ever made on the London stockmarket.

RBS will, however, continue to buy the insurance from the government on revised terms to those first announced in February and as a result the taxpayer's stake in the bank will rise from 70% to 84%.

The Treasury said: "Since the APS was announced, market conditions have improved markedly - largely as a result of the action the government has taken, both domestically and globally in coordination with our partners in the G20 and European Union".

It insisted that the likely costs to the taxpayer and the risks and impacts on the public finances had been "markedly reduced".

The banks are selling off businesses that will represent a "standalone entity" that can be bought by a new entrants into the market and represent nearly 10% of the UK retail banking market.

Lloyds has also agreed not to make acquisitions for three to four years and will not be able to pay dividends to shareholders until the end of January 2012 because of stringent rules imposed by Brussels on the way it must treat owners of its bonds and other debt securities.

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