The future of high street banking will change for ever this week as the Chancellor bows to pressure from Brussels and agrees to break up banks that are supported by the taxpayer.

Alistair Darling is expected to announce tomorrow that Lloyds Banking Group and RBS will be stripped down and various parts sold to new owners, creating as many as three new institutions on the high street.

Mr Darling will argue that this is needed to introduce more competition in the retail banking sector. It comes just a year after the Government agreed to the merger of Lloyds and HBOS to create Britain’s biggest bank.

The deal could mean Lloyds being forced to sell off TSB Scotland, part of the old Trustee Savings Bank, which it bought in 1995; Cheltenham & Gloucester, the former building society; and the online bank Intelligent Finance. This would mean Lloyds’s share of the market in personal accounts in Britain falling from about 30 per cent to 25 per cent.

RBS is likely to be forced to give up NatWest branches in Scotland and its insurance businesses, including Churchill, Direct Line and Green Flag. Williams & Glyn’s, which operated in the 1980s and 1990s, may be resurrected as well.

It is believed that the Spanish bank Santander will be allowed to bid for RBS’s business banking group. Santander has less than 8 per cent of Britain’s small business lending market.

Northern Rock is likely to be split by the end of the year into a “good bank”, BankCo, which can be sold off, and a “bad bank”, the assets of which will be wound down. “We have what we believe is a viable bank [with Northern Rock], which can be sold with private investment coming back in. The remaining assets, they’re not all bad, some of them, you know. If we could take commercial property for example, it may not be worth that much today, but in time it will come back,” Mr Darling said.

Owners of existing retail banks, such as HSBC, will not be allowed to bid for the new banks, in an attempt to encourage competition. The Treasury said last night that the full list of sales had yet to be finalised. One source said the statement may be delayed if details cannot be worked out.

City analysts are sceptical about the Government raising a meaningful sum from these assets, because the likes of Barclays and HSBC are barred from bidding. Mr Darling denied that it amounted to a quick sale. “I am not interested in fire sales, I will only sell when conditions are right,” he said.

RBS will call on the taxpayer for an additional £19 billion support as it seeks to put £270 billion of toxic loans into the state-backed insurance scheme. This issue of “B” shares will mean the government stake rising from 70 per cent to about 84 per cent.

Lloyds, which is 43 per cent owned by the taxpayer, will avoid joining the asset protection scheme after raising £21 billion from other sources.

Vince Cable, Liberal Democrat Treasury spokesman, questioned whether bypassing the asset protection scheme would allow Lloyds to soften its commitments on lending. “If it achieves its objectives this would be an appalling example of the short-term interests of banks being put ahead of national interests,” he said.

The Conservatives called for a full-scale competition review. Mark Hoban, the Shadow Financial Secretary, said: “The Government are not being straight with people. Alistair Darling failed to mention the extra capital that the taxpayer is apparently going to inject into Lloyds and RBS, worth some £25 billion.”

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