The government is to create three new High Street banking chains by 2015 as part of a major overhaul of the sector.
They will be set up by selling off parts of Royal Bank of Scotland, Lloyds and Northern Rock – the banks which had to be bailed out by the taxpayer.
Ministers and the European Competition Commissioner are in talks over the move, which would go some way to recoup the public money invested in the banks.
There is speculation that buyers might include Tesco and Virgin.
The new chains will be standard retail banks concentrating on deposits and mortgages.
In order to boost competition, they will only be sold to new entrants to the UK banking market and not to existing financial institutions.
Ministers say that creating more competitors on the High Street in this way will invigorate the mortgage market and ultimately lead to a better deal for customers.
‘Gilt-edged opportunity’
The government, which holds a 70% stake in RBS and a 43% stake in Lloyds after last October’s bailouts, hopes to announce the move on Tuesday.
It comes as the Financial Services Authority takes over regulation of the way banks treat their customers.
BBC business correspondent Joe Lynam says it represents “a gilt-edged opportunity for non-UK retail banks, especially from the US, to get a firm foothold in the highly profitable British banking market for as low a price as could be imagined a few years ago”.
The Treasury says Chancellor Alistair Darling has not made a final decision on which parts of which banks are to be sold off.
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ANALYSIS
Gillian Hargreaves, BBC News political correspondent
In the words of one Treasury civil servant they will be “boring” banks . They will be sold to new entrants to the banking market. There has been speculation Tesco and Virgin Money may be interested. The first to be sold, as early as next year, will be the most profitable part of Northern Rock. But the government insists it will not be rushed into an early sale and will get value for the tax payer. Government investment in the banks equates to £3,000 for every household in the UK.
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But it confirmed that no British bank will buy the profitable mortgage and savings book part of the Northern Rock, described as the “good” part of the company.
The EU last week backed plans to split Northern Rock in two.
The Conservatives said the break up of the state-owned banks had already been “well trailed”.
A spokesman added: “We have called for more competition in banking, and for government stakes to be used to strategic effect to that end.
“We would also hold a Competition Commission inquiry into the banking market.”
The Lib Dems Treasury spokesman Vince Cable welcomed more competition in the banking sector but said there should be no urgency to the sales.
“We need to be careful that when these split-ups occur, that the prime cuts are not offered to private investors and the scraps left to taxpayers,” he said.
Treasury select committee chairman John McFall MP said the assets should not be sold off for less than their market value and that taxpayers should get the maximum possible return.
Intense discussions
The government needs permission to break-up the banks from European competition commissioner Neelie Kroes.
She has also set tough conditions on Dutch and German banks receiving state aid and is keen that should only be given in exchange for re-structuring and increased competition within the banking market.
BBC Scotland’s business and economy editor Douglas Fraser said four-way negotiations with Lloyds, RBS and the European Commission have reached a particularly intense period over the past three days.
They have been described as “brutal” by one source, and “very delicate” by another, he said.
Recent reports have suggested that Lloyds would sell Cheltenham and Gloucester, Lloyds TSB Scotland and Intelligent Finance – an online division of Bank of Scotland.
RBS is understood to be preparing to put its network of around 300 RBS-branded branches in England up for sale, under the Williams and Glyn brand they used until 1985.
According to a source close to the negotiations, RBS is also “near 100% certain” to be putting its insurance division back on the market, including Churchill, Direct Line and Green Flag.
These were put up for sale earlier this year but the proposed deal required RBS to provide the finance to the buyer, which was rejected by the bank.
If there is no buyer this time, RBS could consider floating its insurance division as a separate company, our correspondent says.
There could be further divestments required of RBS but these are not expected to include its extensive activities in the US, including its ownership of Citizens Bank.
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