A pedestrian passes the head office of the Lloyds Banking Group in London
A pedestrian passes the head office of the Lloyds Banking Group in central London August 5, 2009. REUTERS

Paul Myners, the former Financial Services Secretary during the Labour government of Prime Minister Gordon Brown, has called for the break-up of UK partly-nationalized banking giants Lloyds Banking Group (NYSE: LYG) and Royal Bank of Scotland (NYSE: RBS).

In an article in The Financial Times, Myners said that the public is left at the mercy of a few powerful banks that dominate the British financial industry by restricting competition. And the damage is magnified when one of these large institutions fail.

"Money moves faster than labor, or raw materials. If the banks mess up, society suffers,” he wrote.

“The future lies in less monolithic institutions, with more fluid entries into and out of the banking sector. And this, in turn, may mean undoing existing bank mergers. In practice the banking commission must therefore give proper consideration to splitting one or both of Lloyds Banking Group and the Royal Bank of Scotland."

Myners warns that having only a few dominant banks creates "excess profits, poor customer service and a dearth of innovation, none of which are likely to create a stable system".

Lloyds Banking was formed through the acquisition of HBOS plc by Lloyds TSB – a merger that ultimately led to the British government acquiring a 43.4 percent stake in the company in early 2009.

RBS is also state-controlled.

In fact, Myners was instrumental in the nationalization of RBS and Lloyds during his term under Brown,

However, Myners does not think banks should be made to separate their retail and investment banking arms. Rather, he favors new rules on capitalization, subsidiarization and limits on cross-funding and resolution processes that would lead to a more competitive structure.

In addition, Myners believes the British government should establish smaller banks to serve the country’s small and medium-sized companies.

"In general we also need smaller banks, supported by more capital," said Myners.

Meanwhile, the government is investigating the UK banking sector through an independent Commission on Banking, which will issue its report in 2011.