EU sets exit strategy for troubled banks

UK banks Lloyds and Royal Bank of Scotland (RBS) have been given five years to wean themselves off the taxpayer support propping them up.

The European Commission issued the deadline for all EU governments this week, demanding they sell off their stakes in banks receiving state aid as a result of the global financial crisis within five years.

At the end of this period, the banks could face closure if they are believed to be non-viable.

However, Roderick Logan, retail banking analyst at research and data provider Datamonitor, said while the UK banks will most likely be able to comply, the directive seems “fairly weak” and will most likely be difficult to enforce.

“On the face of it, a five-year deadline appears to be more than adequate for Lloyds and RBS to sort out their affairs,” said Logan, with Datamonitor forecasting a revival of the UK economy in 2010, leading to a boost in lending activity and higher turnover for banks. Such developments, according to Datamonitor, will enable Lloyds and RBS to generate adequate revenue and become viable again by 2013.

“However, the finality of the deadline … is questionable,” Logan said.

“Some EU members (including France and Germany) have a greater tendency to subsidise their industries in order to create national champions. These countries may fight any rigid deadline enforcing their banking institutions to wean themselves off state aid.

“In addition, any threat to completely close down those banks that are unable to survive on their own becomes less credible if it ultimately reduces the number of competitors in what have become more concentrated markets as a result of the downturn.”

Lloyds and RBS, which both have offices in Australia, have developed restructure plans dealing with the withdrawal from taxpayer support.