Neelie Kroes, the European Union (EU) Competition Commissioner has said that the bailed-out banks including the UK’s Royal Bank of Scotland (RBS) and Lloyds Banking Group will have to sell off chunks of its business to comply with new EU rules.

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The new dictate filtering out of the EU could mean that the partly public owned banks could be broken-up so that other smaller banks throughout Europe are not disadvantaged.

The news comes ahead of the state banks August interims that analysts expect will reveal that rising unemployment has added to bad debts and mortgage arrears hitting profits, although there is some optimism that RBS in particular  may report a small profit due to recovery in its global business.

Banking analyst Sandy Chen, at Panmure Gordon, has estimated that Lloyds may have to write off £50bn of loans over two years, £24bn this year and £23.5bn in 2010, largely as a result of the takeover of HBOS.

To appease the EU Sandy Chen, also expects Lloyds and RBS to sell off core and non-core assets that and following Lloyds decision to shut down their 164 Cheltenham & Gloucester branches will slash Lloyds 3000 branches by 20%.

The EU has also put a question mark over Lloyds insurance business Clerical Medical and their fund manager Insight which could also be on the chopping block.   Following the EU directive, RBS, who are aready reducing their Asia business, may also have to scale-back its continental operations.

The EU is expected to announce the detail of the new rules shortly which are thought to allow the UK’s state owned banks five years to complete their structuring by which time many of are likley to be firmly back in the private sector.

Lloyds shares are currently down 2.6% at 71.5p and RBS are steady at 39.75.