LONDON Failed banks that have been bailed out by the state might need to be broken up to prevent a repeat of the credit crisis, shadow Chancellor George Osborne said on Wednesday.
The state has a 70 percent stake in Royal Bank of Scotland (RBS.L) and also owns a majority in the Lloyds Banking Group (LLOY.L) after bailing them out. Northern Rock has also been nationalised after it ran into problems.
"When the time comes to sell off those shareholdings, we need to think very carefully before simply selling them to the highest bidder without thinking through the consequences for the wider economy," Osborne said in a speech in London.
"We should look at whether Britain in fact needs smaller banks," he added.
The comments are significant because the Conservatives lead Labour in opinion polls and are on course to return to power for the first time since 1997. A general election must be held by the middle of next year.
Prime Minister Gordon Brown has said the banks will eventually be returned to private ownership and that the government hopes to make a profit for the taxpayer on the deal.
Osborne reiterated Conservative plans to restore the Bank of England to a central role in regulating the financial industry, reforming the tripartite structure set up by Labour in which the Bank, the Treasury and the Financial Services Authority all play a role.
He also said a new government and the Bank should review changes to the inflation target so that it reflected housing costs.
Pressed on his plans for the banking industry, Osborne stressed that any sale of state-owned shares was some way in the future.
However, he said there was a risk that recreating banks that were "too big to fail" would sow the seeds of a repeat of the current financial crisis.
"It would be a bitter irony if we came out of this crisis with a banking system that was even more concentrated and even riskier than the one we had before," he said.
(Editing by Will Waterman)