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Could Lloyds Banking Group have plans to flog off Bank of Scotland?

As rumours go, this is at the mischievous end of the spectrum.

But it stems from the pressure being on the merged Lloyds-TSB-Halifax-Bank of Scotland to scale itself down, and it has yet to say how it intends to do so.

The biggest threat comes from Brussels, where European Commissioner Neelie Kroes has been setting out new guidelines on how to maintain competition in the banking marketplace while around 80 banks are steered out of trouble with their governments' aid.

Having confronted Germany's Commerzbank, she has already made clear that Lloyds Banking Group (LBG) and Royal Bank of Scotland (RBS) are in her sights for special attention.

That's both for their market share and, allied to that, the support they're getting from the UK government.

Moral hazard

She wants to make sure the support of governments does not mean unfair competition for banks that are not needing bailed out.

She wants to ensure financial stability as a first priority, without losing sight of the importance of effective competition.

And there's concern that the bail-out of banks that are "too big to fail" - or indeed, any bank - creates a problem of moral hazard, in that such bankers can afford to be reckless.

So banks will have to be stress tested.

They have to set out their plans to scale down where they are too large.

They will be barred from aggressive pricing or marketing funded by state aid.

Right price

The banks' owners have to share with taxpayers much of the burden of restructuring.

And they have to get out of government dependency within five years, or else face takeover or winding up.

In a recent speech, Kroes said: "The likelihood of significant divestments by RBS and Lloyds is strong."

For that, RBS was already on the case, having announced it plans to shed about a fifth of its assets, when it can find buyers, and at the right price.

A sale of much of its Asian operation, built up by ABN Amro, is likely to be announced soonish.

But retreating from its global reach won't address the potential RBS has to play too dominant a role as a lender in the British economy.

Chief executive Stephen Hester met Commissioner Kroes last week to explain what is planned.

Split them

Lloyds has said much less about its plans for scaling down, beyond finance director Tim Tookey saying in May that non-core operations would be scaled down in time.

It talks about a "strong plan to exit state aid".

Just how much it needs to shed is being negotiated through the UK government, which is responsible to the European Commission on behalf of the banks it regulates and partly owns.

A senior official at the Commission said on Thursday that the restructuring plans from two very large British banks have been filed in recent weeks, and await approval.

What these banks will hope is that selling off marginal, under-performing and non-core assets will avoid a ruling that would split them more fundamentally.

That's particularly important to Lloyds' management, who have staked their reputations on the value added by a very risky merger that by-passed competition rules, and for whom a forced de-merger would surely be the last straw.

One indication that divestment process is under way is a report today that LBG's London-based asset management outfit, Insight Investment, is the subject of bids from potential buyers.

The company wasn't commenting on the report.

Sticky and expensive

But it may offer some relief for those at Scottish Widows Investment Partnership, the asset management wing of Lloyds TSB, operating out of Edinburgh, which could as easily have been getting sold off.

The concern about these giant banks' dominance of British lending extends to governments in London and Edinburgh.

The chancellor said on Thursday that he is to call in bank chiefs over the next two weeks, demanding to know why lending to business remains sticky and expensive.

Meanwhile, the Scottish Government's Council of Economic Advisers (CEA) has raised concerns about access to credit from the traditional Scottish lenders.

Clydesdale Bank this week said it was making £1bn more money available for loans over the next 12 months, specially aimed at small and medium sized firms.

But with RBS and Bank of Scotland trying to rebuild their balance sheets and get control of lending risk, the council - chaired by former RBS chairman Sir George Mathewson - is recommending to ministers that they get proactive in trying to bring other lenders into the Scottish market.

According to minutes of the most recent CEA meeting, Alex Salmond was told: "There is a need to rebuild the Scottish banking sector by attracting institutions which do not currently have large operations in Scotland and may be willing to lend in more innovative ways."