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The government is to create three new High Street banking chains by 2015 as part of a major overhaul of the sector.

They will be set up by selling off parts of Royal Bank of Scotland, Lloyds and Northern Rock - the banks which had to be bailed out by the taxpayer.

Ministers and the European Competition Commissioner are in talks over the move, which would go some way to recoup the public money invested in the banks.

There is speculation that buyers might include Tesco and Virgin.

The new chains will be standard retail banks concentrating on deposits and mortgages.

In order to boost competition, they will only be sold to new entrants to the UK banking market and not to existing financial institutions.

Ministers say that creating more competitors on the High Street in this way will invigorate the mortgage market and ultimately lead to a better deal for customers.

'Gilt-edged opportunity'

The government, which holds a 70% stake in RBS and a 43% stake in Lloyds after last October's bailouts, hopes to announce the move on Tuesday.


ANALYSIS
Joe Lynam, BBC business correspondent

As part of the stipulations of EU state aid rules, the UK was always facing the prospect of having to sell off at least parts of those banks which it bailed out last year.

Now it looks as if that sell off process is to begin in earnest.

Though the Chancellor says he has not yet decided which brands are to be hived off, it looks increasingly likely that state controlled banks such as RBS, Northern Rock and Lloyds Banking Group (LBG) are to be broken up in some form.

This means that individual brands within those banks, such as Cheltenham & Gloucester and the TSB (LBG), as well as Williams and Glyn (RBS), could be sold off.

The unanswered question now is whether the Treasury jumped or was about to be pushed by Brussels.
Fresh bank rules come into force
Sell-off jigsaw becomes clearer
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It comes as the Financial Services Authority takes over regulation of the way banks treat their customers.

The move could open the door to the UK banking market to overseas financial institutions.

BBC business correspondent Joe Lynam says it represents "a gilt-edged opportunity for non-UK retail banks, especially from the US, to get a firm foothold in the highly profitable British banking market for as low a price as could be imagined a few years ago".

The Treasury says Chancellor Alistair Darling has not made a final decision on which parts of which banks are to be sold off.

But it confirmed that no British bank will buy the profitable mortgage and savings book of the Northern Rock, described as the "good" part of the company.

The EU last week backed plans to split Northern Rock in two.

The Conservatives said the break up of the state-owned banks had already been "well trailed".

A spokesman added: "We have called for more competition in banking, and for government stakes to be used to strategic effect to that end.

'Unnecessary distraction'

The Lib Dems Treasury spokesman Vince Cable welcomed more competition in the banking sector but said there should be no urgency to the sales.

"We need to be careful that when these split-ups occur, the prime cuts are not offered to private investors and the scraps left to taxpayers," he said.

Treasury select committee chairman John McFall MP said the assets should not be sold off for less than their market value.

"It is important to ensure that we get taxpayer return for this bail-out. I'm relaxed about the timescale. I do not want to sell off [bank assets] at a cheap price, I don't want a fire sale," he told the BBC.

Peter McNamara, former head of personal banking at Lloyds TSB and managing director of the Alliance and Leicester, said that restructuring the banks in the current climate could in fact prove counter productive.

"Is this a distraction when the banks should be concentrating on supporting the UK economy?"

"Half the banks in the UK are suddenly going to be reorganised when you could argue their day job is to supp