By Margot Patrick
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- Sweeping plans to recapitalize and restructure Royal Bank of Scotland Group PLC (RBS) and Lloyds Banking Group PLC (LYG) are to be announced by the U.K. government Tuesday, a person familiar with the matter said Monday, in a series of measures that will shake up the nation's banking sector and nearly double taxpayers' exposure to the two banks rescued from potential collapse a year ago.
The plans are expected to include RBS issuing about GBP19 billion in new shares, raising the government's stake above 80%, from 70%. Lloyds will launch a roughly GBP13 billion rights issue the government will subscribe to for about GBP5.5 billion, keeping its 43.5% stake intact.
The government will also agree to insure a GBP280 billion book comprising some of RBS' riskiest loans and investments, people familiar with the matter say, though RBS will be on the hook for a larger chunk--about GBP60 billion--of any initial losses than when the insurance program was first agreed in February. Additional shares could be issued to pay annual fees for the policy, to total around GBP6.5 billion in all.
Lloyds, meanwhile, will side step its own March plan for a similar government insurance policy, a person familiar with the matter said, instead paying about GBP2.5 billion to the government as a sort of "break fee" for having provided it with backstop support since then.
The moves mean government support for the two banks could rise above GBP63 billion, though the final structure of the deals, and any payout on the RBS assets will determine the ultimate figure.
U.K. banks were some of the hardest hit by market turmoil last year, as investors lost confidence in their ability to withstand a prolonged recession and liquidity dried up.
The government in October 2008 invested GBP20 billion into RBS and GBP17 billion in Lloyds to help them keep lending to businesses and home buyers and make it through the then-deepening financial crisis. Lloyds later paid back about GBP2.3 billion.
Last week, the U.K. Treasury agreed to put as much as GBP12 billion in new money into Northern Rock PLC, the mortgage lender it nationalized in Feb. 2008 and which already has a GBP15 billion loan outstanding. Other government commitments in the banking sector include a GBP18.4 billion loan to fund the nationalized portion of lender Bradford & Bingley, whose mortgage book is being wound down by the state.
The massive state aid meant the U.K. had to lay out to the European Union how the banks could be restructured to ensure their long-term viability, a process that involved bashing out what disposals the banks would have to make to keep the U.K. banking sector competitive.
RBS earlier Monday said it will have to make more divestments than initially thought. Previously it had said it would have to reduce its market share in lending to small businesses. Lloyds, however, Thursday said it doesn't expect disposals to have a material impact on its business.
The two banks have hefty market share in a number of key areas, including RBS controlling about 20% of lending to small businesses, and Lloyds holding about 30% of both the current account and mortgage markets after its merger in January with HBOS PLC.
Lloyds' merger with HBOS was pushed through by the government as the bail-out money was handed out last October. Chancellor Alistair Darling on Sunday said breaking up Lloyds, RBS and Northern Rock will help create three new lenders by 2013, boosting competition.
Tuesday's announcement is to come as the U.K. prepares to host meetings of G20 finance ministers and central bankers in Scotland this coming weekend. The U.K. is keen to show it is serious about reforming its financial sector and is urging other nations to move quickly to shore up their banks to face remaining challenges from the financial crisis.
-By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451; margot.patrick@dowjones.com
(Sara Schaefer Munoz of The Wall Street Journal and Laurence Norman contributed to this article.)