Europe warns Lloyds on Halifax

Pressure was mounting on Lloyds Banking Group chief executive Eric Daniels today, as regulators in Brussels consider forcing the part-nationalised bank to offload mortgage lender Halifax.

The European Commission has warned Lloyds, 43%-owned by the taxpayer, that it may have to get rid of Halifax in return for receiving billions of pounds of state aid.

Such a move would be a disaster for Daniels and could trigger his departure from the bank.

It would also be an embarrassment for Gordon Brown who helped stitch together the Lloyds rescue of stricken rival HBOS, the owner of Halifax and Bank of Scotland.

The deal, which gave the combined bank a third of the mortgage and current account markets in the UK, has already cost Lloyds chairman Sir Victor Blank his job. Sir Win Bischoff took over yesterday

Competition Commissioner Neelie Kroes has yet to make a final decision but it is understood this will include draconian penalties on Lloyds.

A source close to the negotiations said: "The Commission has not made a final decision but what they are talking about sounds a lot like Lloyds giving up Halifax."

The Commission is looking at the £17 billion Lloyds received from the Government when it rescued HBOS last year. It is also considering Lloyds' decision to insure £260 billion of toxic assets in the Government Asset Protection Scheme (APS).

If Brussels rules that state aid gives Lloyds an unfair advantage over its rivals, it can force the bank to sell assets.

Lloyds is now pondering whether to scale down its involvement in the APS and raise money in a rights issue instead to reduce its dependency on the state.

Analysts also point out that Lloyds was the first bank in Europe to pay back any state aid.

Lloyds hoped it could satisfy the Commission by selling Cheltenham & Gloucester and making disposals in Scotland, but Kroes is understood to have rejected such a deal.

Lloyds declined to comment but is known to be desperate to save Halifax, the "good bank" inherited from HBOS to Bank of Scotland's "bad bank".

Brussels forced German bank Commerzbank to shed 45% of its balance sheet in return for �18 billion (£16 billion) in state aid, and yesterday warned warned that the Dutch deal to bail out ING may have been too generous.