Nov. 1 (Bloomberg) -- U.K. Chancellor of the Exchequer Alistair Darling said Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc will carry out “quite a substantial divestment” of branches and institutions to improve competition in Britain’s banking sector.

The U.K. Government, which owns 70 percent of RBS and 43 percent of Lloyds, expects about three new banks to be formed by 2013 as a result of the sell-off and that their owners will include new entrants to the financial sector, Darling told the British Broadcasting Corp.’s “Politics Show” today.

“If we don’t have more competition we’re going to end up with perhaps half a dozen big providers and that really would represent quite a major reduction in choice and that just would not be acceptable,” Darling said. “What you really want to do is to have quite a substantial divestment” by RBS and Lloyds.

RBS is trying to get back on its feet after posting the biggest loss in British corporate history during the credit crunch and may be forced by the European Union to sell its insurance unit, 300 branches and some investment-banking assets. Lloyds, which needed a 17 billion-pound ($28 billion) government bailout, is trying to raise more than 11 billion pounds in a rights offering to exit the government’s asset insurance program.

“What I want to do now is to begin the process of reform and reconstruction so we have got a safer, more competitive banking system, with more high street banks than we have at the moment, with new entrants coming in,” Darling said.

‘Boring Banks’

“Boring banks can actually be quite good banks,” he said. “The problem with some of our banks is they got far too exciting and too interesting with catastrophic consequences.”

The three consumer banks created will be called The TSB, Williams & Glyn’s and BankCo, the Sunday Telegraph reported, without saying where it got the information. Williams & Glyn’s will be formed from “hundreds” of RBS branches in England, the newspaper said while BankCo will be the “good bank” formed from state-owned Northern Rock.

Darling said he would sell off the government holdings in the banks when he was sure he could recoup the state investment.

“I’m not interested in fire sales, I will only sell when the conditions are right and we can get our money back,” he said.

The government must make sure that banks put the national interest ahead of their short-term interests and lend money to businesses, said Vince Cable, who speaks on the economy for the opposition Liberal Democrats.

‘Long-Term Project’

“There’s no justification for a rapid sell-off of state assets in the current depressed environment when the taxpayer will get a very poor deal,” Cable said in an e-mailed statement.

“This is a long-term project and the most important priorities are to make sure banks lend to good customers, especially businesses, in order to stave off deepening recession and growing unemployment and that the taxpayer gets value for money,” Cable said.

The British Bankers Association, which said greater competition in consumer banking would improve service to customers, called on the government to ensure its plans take account of international competition.

“The U.K. needs a successful banking sector,” the BBA said in an e-mailed statement today. “Any plans must ensure the U.K. remains both internationally competitive and should help maintain our financial services industry’s leading global position.”

To contact the reporter on this story: Thomas Penny in London at tpenny@bloomberg.net

Last Updated: November 1, 2009 10:06 EST