UPDATE 3-Crunch time looms as UK banks press EU for solution

Tue Oct 6, 2009 7:55am EDT

* EU ruling expected later this month - sources

* Negotiation still at early stages - sources

* RBS, Lloyds, and British Treasury decline to comment

(Writes through with comment from sources)

By Clara Ferreira-Marques

LONDON, Oct 6 (Reuters) - The European Commission is expected to detail punitive measures against bailed-out Lloyds (LLOY.L) and Royal Bank of Scotland (RBS.L) this month, as the banks press for a quick resolution, sources familiar with the matter said.

The Commission and the British Treasury -- acting on behalf of banks it owns large stakes in -- have been negotiating for months over disposals to reduce the banks' share of key markets and compensate for billions of pounds received in state aid.

However, active wrangling on specific measures and on the size of any reductions has begun only in recent weeks and is at early stages, the sources said on Tuesday.

Initial proposals for market share cuts from British banks -- as low as single digits from Lloyds -- have already been batted back by EU officials who considered them too modest.

The two sides are expected to hold a further meeting soon, the sources said, with Lloyds and RBS expected to table improved offers.

The Commission has, however, dismissed reports it is demanding a cut of up to 10 percent as "premature speculation".

But time pressure is increasing, with a new Commission expected to be named as early as next month and Competition Commissioner Neelie Kroes expected to leave at the end of her mandate. Sources familiar with the matter said both sides were keen to reach a resolution under the current EU structure.

Both Lloyds and RBS are waiting on EU negotiations to hammer out the final terms of a key government-backed insurance scheme for toxic debt and, potentially, to carry out share issues.

Lloyds could raise well over 10 billion pounds ($15.9 billion) before the end of the year to reduce its involvement in the insurance scheme and its reliance on the government, industry sources have said, while RBS is considering a more modest cash call of 3-4 billion to help pay the scheme's fee.

Neither, however, can go ahead without an EU resolution.

Lloyds -- Britain's largest retail bank since its takeover of rival HBOS earlier this year -- is widely expected to be told to cede portions of its market share in current accounts, most likely by selling off branches, while RBS is set to be told to ease its grip of banking for small and medium-sized businesses.

Lloyds, as leading provider of current accounts, savings, personal loans, credit cards and mortgages in Britain, has a third of current accounts and provides one in three home loans.

Reports have said Lloyds could be forced to give up Halifax, the prize of its government-sponsored acquisition of beleaguered HBOS. But sources close to the matter said a softer compromise is set to be reached with branches sold instead, potentially to a new entrant.

Neither bank, however, will be forced into fire sales, as the Commission allows banks up to five years to restructure.

Analysts at Cazenove said in a note earlier this week the sanctions could cost Lloyds up to 1.1 billion pounds of annual earnings, but noted the bank closed branches at an annual average rate of 3 percent, with 500 shuttered in eight years. "We believe they would willingly close 1,000 branches".

RBS, Lloyds and the Treasury declined to comment. (Additional reporting by Foo Yun Chee in Brussels; Editing by Dan Lalor) ($1 = 0.6271 pound)

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