EC Says Lloyds Breakup Talk Is Pure ‘City’ Speculation

Speculation that the European Commission could order a breakup of Lloyds Banking Group is nonsense, but the possibility that the Commission could order the group to sell some assets should come as no surprise, a senior commission officer told CNBC Thursday.

The EC says it's working closely with the UK authorities and that "any suggestion about specific selloffs required is premature City speculation,” the officer said.

Every European company that receives state money, be it a bank or a candy factory, has to respect the European Union state aid guidelines. After receiving public cash, the company will have to follow three rules:

  1. It will have to present a restructuring plan endorsed by the European Commission.
  2. After the restructuring, the company has to become financially viable.
  3. The company will have to reduce its activities to avoid competition distortions on the market.

The third point is the one that really matters in Lloyds' case. Reducing activity is a bit vague. It could mean diminishing the amount of lending for mortgages in a specific country, closing a number of branches, or the obligation of selling parts of a business. It could be all these options combined.

In the case of Commerzbank, after endorsing 18 billion Euros of capital injection by the German government in the bank, competition commissioner Neelie Kroes in May ordered the bank to focus on its core business of retail and corporate banking and to reduce its investment banking activity and commercial real estate.

Commerzbank had to give up the core of its commercial property lending business as well as Eurohypo's role in public sector finance. The bank was also forbidden from using public money on the Dresdner Bank deal and was restricted from acquiring other financial institutions for a period of time.

If Lloyds is asked to sell part of Halifax, for example, the deadline for such action will obviously be kept in secret to avoid a stronger impact on any asset price. While the Commission says it still hasn't taken a decision, the UK government and Lloyds management still have time to lobby Neelie Kroes.

According to the Times newspaper, Lloyds could offer up 1,000 branches for sale as a compromise to gain EC approval. According to the Commission, there's no negotiation on remedies needed to avoid competition distortions.