This article has been adapted from our sister site across the pond, Fool UK.
As losses from U.S. subprime mortgages mounted during 2007, U.S., U.K., and European banks started to feel the strain.
Taxpayers to the rescue
Fearful of these mega-losses, banks stopped lending to each other and, in August 2007, the inter-bank lending market effectively shut down. This credit crunch placed huge pressure on the liquidity -- and even solvency -- of banks across the world.
This vicious circle came to a head in mid-September 2008, with the collapse of Lehman Brothers and the rescue of several major U.S. institutions. In October 2008, the U.K. government announced huge injections of equity into key banks, including Lloyds Banking Group
As a result of this state aid, taxpayers today own 41% of Lloyds and 84% of RBS. However, there is a price to be paid for this government generosity. In 2009, the European Commission gave Lloyds and RBS four years to strengthen their capital ratios, shrink their balance sheets, and reduce their market shares.
Banks on the block
Hence, both banks must sell branches and divisions -- in total, Lloyds and RBS must sell almost 1,000 branches. RBS must sell all of its 318 branches in England and Wales (once branded Williams & Glyn's), and pull the NatWest brand from Scotland. Lloyds must dispose of 600 branches, including its Cheltenham and Gloucester, Intelligent Finance, and TSB Scotland arms.
In addition, failed bank Northern Rock (100% owned by taxpayers) has been broken up into a "good" bank and a "bad" bank, with offers expected for the best of its assets.
Thus, there's a ding-dong of a battle going on, with various new entrants keen to break into the previously closed world of high-street banking. For example, in April, Sir Richard Branson's Virgin Money made an abortive bid for RBS's unwanted assets -- a battle likely to be won by Spain's Banco Santander
Grumpy Old Bank?
This battle for second-hand banks has heated up with the news that a British consortium has been created in order to snap up banking assets.
The group -- which BBC pundit Robert Peston has dubbed the 'Grumpy Old Men' bank -- has appointed City veterans Lord Levene (68; chairman of the Lloyd's of London) and Sir David Walker (70; author of last year's Walker Report into banks) to its board. These City grandees are joined by Lord McFall (65; former chairman of the Treasury Select Committee) and Charlie McCreevy (60; former EU internal market commissioner).
The expectation in the market is that these "silver foxes" aim to buy up unwanted banks and then revitalize them using "traditional" banking methods. City commentators expect the group to stick to safe, old-school lending and savings accounts, supported by superior levels of customer service and personal contact.
The good news for this consortium is that City regulator the Financial Services Authority (FSA) has allowed the group to apply for a banking license at the same time as bidding for banking assets. This will speed up the process, allowing the "GOM Bank" to enter the market earlier than previously expected.
Were the GOM to buy the Lloyds assets up for sale, they would gain a near-5% stake in the key market for personal current accounts. However, this slice of business would not come cheap, with some analysts giving it a price tag of £3-4 billion. For now, Project New Bank is set to raise £50 million by listing on AIM, the London junior market, with further funds to be raised at a later date.
Flowers in Kent
In addition, New York-based private-equity investor JC Flowers has paid £50 million for a 49% stake in a joint venture created with Kent Reliance BS (KRBS).
Buying into KRBS (which has a single branch) would give JC Flowers a banking license and enable it to take part in the ongoing consolidation of the building-society movement. The rumor is that the joint venture aims to buy up and revitalize as many as ten ailing building societies.
It's a tough game
That said, U.K. high-street banking is a highly crowded market, with market shares for most products and services controlled by the 'Big Four' -- Lloyds, RBS, Barclays
Nevertheless, were a new player to take control of the unwanted Lloyds assets and then float on the stock market, it would immediately leap into the blue-chip FTSE 100 index. So, we could well see a genuine rival to the Big Four emerging in late 2010 or early 2011. Watch this space ...
More from Fool U.K.'s Cliff D'Arcy:
Brian Richards prepared this article for publication on Fool.com. It was originally written by Cliff D'Arcy. Neither Brian nor Cliff owns shares of any companies mentioned. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.
