By Mark Kleinman, City Editor
Competition regulators are expected to deliver a massive boost to George Osborne on Wednesday when they rule that branch disposals by Britain's two big state-backed banks are broadly sufficient to enhance competition.
Sky News has learnt that the Office of Fair Trading (OFT) is likely to say that plans for Lloyds Banking Group and Royal Bank of Scotland (RBS) to offload almost 1000 branches between them do not require significant augmentation.
The move will pave the way for the Chancellor to declare another milestone in his reform of the British banking system and begin the sale of the taxpayer's 39% stake in Lloyds.
Treasury insiders confirmed a Sky News report last weekend that said Mr Osborne was actively looking to commence the sale process this week.
The OFT is expected to have taken soundings from Brussels before declaring its satisfaction with the size of the disposals by Lloyds and RBS, which is expected to sell more than 315 branches primarily serving small and medium-sized companies (SMEs).
Dubbed 'Project Rainbow', RBS has lined up three rival bidders for its network and is expected to decide on a preferred offer this month.
In a speech in June, Mr Osborne said he had asked the OFT to conduct a review of the SME banking market, which is expected to report its full findings later in the year.
"As part of this work, I have asked the OFT to review the impact that new challenger banks created by Lloyds and RBS will have on strengthening competition in small business banking, and to identify what more can be done," Mr Osborne said.
Mr Osborne had asked for a review of the SME banking market Lloyds is in the process of carving out more than 630 branches as a standalone network using the TSB brand, which it relaunched on Monday. The network has a relatively small presence in small business banking.
Insiders said the fact that Lloyds would not be forced to sell a much larger number of branches would fuel further momentum in the bank's share price.
The stock touched a 12-month high on Tuesday and closed in excess of the level paid by the last Labour government to rescue the bank in 2008.
"The [Lloyds share] price is very attractive now," said a person close to a prospective sale of part of the Government's Lloyds stock.
The exact size or terms of the shareholding likely to be offloaded were unclear on Tuesday night although insiders said it was unlikely that Mr Osborne would want to sell less than £5bn, or about 10% of Lloyds' equity.
They said a deal could be announced as soon as Wednesday afternoon.
Such a deal would possess huge symbolic significance as the Government seeks to shed the legacy of the 2008 bail-outs, having sold Northern Rock to Sir Richard Branson's Virgin Money in 2011.
A sale of the Government's shares in RBS will take much longer as Mr Osborne considers a more fundamental overhaul of the bank.
Lloyds and RBS declined to comment.
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