UK Chancellor of the Exchequer Alistair Darling welcome school children to an event at 11 Downing Street to celebrate the first ever Child Trust Fund payments for seven-year olds.

UK government controlled banks Lloyds and RBS are to get a further £31.3bn bailout following negotiations with the British Treasury over their participation in a government program to insure their bad assets, and with the EU over how many assets they should have to divest in return for state aid.

The Treasury will inject £25.5bn into RBS, the Royal Bank of Scotland and owner of the Irish bank, Ulster Bank, to bring the total of public capital to £45.5bn. Lloyds will raise £21bn from investors, with the government providing £5.8bn.

RBS said it will spin off its insurance arm and sell RBS branches in England and Wales.

Lloyds will escape greater government control and large divestitures while RBS will be more dependent on the government.

The agreement will increase the public stake in RBS to 84.4% from 70% today.

The UK owns 43% of Lloyds, which was pressured by the British government in 2008 to acquire the failing home loans lender HBOS.

Treasury statement

Goodbody analyst Eamonn Hughes comments: "In terms of sector newsflow, we are confronted today with UBS results which look behind expectations (though the level of one-offs is again material). But more importantly, both Lloyds and RBS have outlined their latest plans in conjunction with the UK government, though both have been heavily flagged in recent weeks.

Lloyds is to exit the APS in the UK and is set to raise private sector capital. It will raise £13.5bn of equity in a rights issue (the government will subscribe to keep its stake at 43%, investing £5.7bn), equivalent to 58% of its market capitalisation. It will also target £7.5bn by swapping existing debt for contingent capital. The announcement provides an immediate 230bps boost to core tier 1 capital to 8.6% and contingent core capital of 160bps if core equity falls below 5%. Lloyds will also pay a £2.5bn fee to withdraw from the APS. Sticking with Lloyds, it also released an IMS, reiterating its earlier commentary at the H1 stage, that margins are stabilising - were flat in Q3 - and group impairments should peak in H1, as they are expected to be significantly down in H2. On the latter, within the retail business, they are still anticipated to rise modestly in H2 over H1, though arrears levels have improved in H2. Note we recently cut our mortgage credit loss assumptions for BOI in the UK on the back of the improving macro data there.

On the other hand, RBS is to remain within the APS. Its first loss to be borne has risen from £42bn to £60bn though the level of assets to be insured is smaller, falling from £325bn to £282bn. The smaller pool was flagged in recent weeks. The government capital injection is reiterated £25.5bn and the government is removing the undertaking to forego for up to 5 years certain tax losses and allowances (which help with the higher first loss). It too will get contingent capital from the government to ensure the core equity ratio doesn’t fall below 5% (the new floor?). The government’s economic interest rises to 84%.

Importantly, from an EU perspective, there appear to be headline agreements on disposals which combined account for nearly 10% of the UK retail banking market and must be sold to small or new players. Just as these assets are available, Irish bank balance sheets are weakened, so obviously won’t be interested in them. However, RBS is likely to be annoyed with the view that it must rank no higher than number 5 in the combined all debt league tables globally for 3 years. RBS has reached agreement in principle with the EU on these measures though in a post ING and post RBS world, it looks like it will be difficult in future for any bank to raise equity until such a time as they get broad clearance from the EU for their business plans. A point to bear in mind for the Irish banks!"