By Mark Kleinman, City Editor
Labour has retreated on a threat to carve up Britain's biggest banks less than 15 months after Ed Miliband said lenders would be forced to sell "significant numbers of branches".
Sky News can reveal that Labour has quietly drawn up plans to accept TSB, which has already been operating as an independent entity for more than a year, as one of two new banks that the party has said it wants to challenge the main high street players.
In its General Election manifesto published on Monday, Labour said it would "increase competition on the high street".
"Following the Competition and Market Authorities [sic] inquiry we want a market share test and at least two new challenger banks," it said.
Sources inside Labour and the banking sector said that shadow cabinet ministers had recently indicated that they were prepared to accept TSB and Williams & Glyn - which is in the process of being carved out of Royal Bank of Scotland - as the two designated challengers if they demonstrated the potential to reach a 5% share of key banking markets.
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TSB currently has a market share of just under 4.5% but is gaining new current account customers at a faster rate than many of its competitors, buoyed by the industry's embryonic seven-day switching service.
It is in the process of being acquired by Spain's Banco Sabadell in a £1.7bn deal.
In a speech in January 2014, Mr Miliband pledged to break up the biggest UK banks, saying that the process would begin immediately after a Labour government came to power.
"On day one of the next Labour government, we will ask the Competition and Markets Authority (CMA) to report within six months on how to create at least two new sizeable and competitive banks to challenge the existing high street banks," he said.
"I want to be clear about the difference this will mean: this is not about whether we should have new banks, the question this government is still asking, but about how.
"It is not about creating new banks that control some tiny proportion of the market, but new banks that have a substantial proportion and can compete properly with existing banks.
"And we are not asking whether existing banks might have to divest themselves of significant number of branches, we are asking how we make that happen."
Mr Miliband's speech underscored his determination to be seen as a champion of market reform in areas where consumers are widely perceived to have suffered from excess concentration.
In energy, that prompted a pledge to freeze retail prices for 20 months, which was repeated in the manifesto.
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However, Mr Miliband's critics are likely to accuse him of watering down the pledge to impose "a day of reckoning" on the banking industry.
Since the Labour leader's intervention last year, the CMA has opened a formal inquiry into the personal current account and SME banking markets, with its recommendations for reform expected later this year.
In a paper on banking reform published earlier this year, Labour repeated its pledge to see the creation of "at least two new challenger banks to address the lack of competition in the sector and a market share test to ensure the market stays competitive for the long term".
Although the paper said the CMA would be asked to advise on "how much the market share of the big banks should be reduced", there was no reference to an enforced branch or market share sell-off by the main high street lenders.
A Labour source insisted that its plans to improve competition in banking had been "consistent" throughout the period since Mr Miliband's January 2014 speech.
