RBS, Lloyds and the Rock: back to the age of boring

The costs of the break-up of Royal Bank of Scotland, Lloyds and Northern Rock were estimated last night at £40bn as details of the EU-directed scheme leaked ahead of Tuesday's expected announcement by Chancellor Alistair Darling.

The elevated taxpayer expense of implementing the good bank/bad bank plan is a blow to Darling, who has presented the sell-off as an economical approach to restoring competition in the troubled banking sector.

Under the complex capital and insurance requirements underpinning the scheme, RBS could receive £26bn, raising the taxpayers' stake from 70 per cent to 85 per cent. Lloyds could need £7bn; Northern Rock an extra £8bn to become an active mortgage lender again.

Yesterday, Darling reiterated his desire to "begin the process of reform and reconstruction" to create a "more competitive banking system". It could take four years to complete, open up high street lending to foreign ownership and lead to the creation of at least three new retail banks.

But who are the potential purchasers? When RBS put its Chinese, Indian and Malaysian retail and investment group assets up for sale earlier this year interested parties included the Australia & New Zealand Banking Group.

Vividly symbolic of how discredited the past two decades of aggressive banking practices are now viewed, RBS's high street operations will be returned to its original incarnation Williams & Glyn's, the sober British high street institution the Scottish bank bought and renamed in 1985.

Downing Street thinking mirrors banking sector belief that 10 banks with 10 per cent of the business are far less likely to get themselves into the financial fixes that led to the crisis.  Retail banking, in a sense, will be returned to the era when banking was based on relationships and loans were granted based on the good standing of the customer.

Darling stressed that retail banking could also be profitable. "Boring banks can actually be quite good banks," he said. "The problem with some of our banks is they got far too exciting and too interesting with catastrophic consequences."

In the case of RBS, that means placing £270bn of bad loans into the Government's Asset Protection Scheme and reducing its balance sheet by 40 per cent by selling its insurance unit, 300 branches and some investment-banking assets. Still, one lesson from the Swedish banking crisis of 1991 is that under-valued 'bad bank' assets, if managed correctly, are ultimately more profitable investments.

But there are new warnings that a massive asset bubble is forming on the back of US currency carry trades as well as clear evidence that not all bail-outs have happy endings: last night, CIT, a 101-year-old US lender, filed for bankruptcy costing US taxpayers at least $2.3bn in TARP funds. ·