(Adds details and background)
ZURICH, Sept 5 (Reuters) - The Swiss government wants to sell a minority stake in PostFinance and let the banking arm of the country's postal service compete in the lending market, the cabinet said on Wednesday.
The plan, details of which still need to be worked out, would ease pressure on the systemically important bank at a time when negative Swiss interest rates are weighing on its results.
The changes would also gradually inject more competition into the Swiss market for loans and mortgages.
The government made clear it did not envision a complete privatisation of PostFinance, saying the state would keep a majority stake in the bank with 3 million customers and around 120 billion Swiss francs ($123 billion) of client assets.
PostFinance takes deposits and ensures payments traffic across the country, making it an important player in the domestic banking landscape.
But current law bans it from lending, making it hard for it to offset the impact of negative rates by charging more for loans as rivals like UBS and Credit Suisse do.
That would change under new rules that could take effect next year.
"Without access to the domestic credit and mortgage market, PostFinance will not be able to develop a promising business model in the long term," the cabinet said. Other banks would not suffer unduly because its lending would grow slowly over years.
PostFinance in August announced it would begin charging more private customers fees to mitigate the impact of negative rates. It said a prohibition on lending money to people to buy real estate had led to an erosion in interest income.
PostFinance also needs to meet stepped-up "too big to fail" capital regulations for systemically important domestic banks due to come into force next year.
The government said PostFinance should create equity for this by retaining profits, capturing supplementary capital benefits of the Post Group, and raising funds by finding new shareholders.
Loss-absorbing debt capital would be only a secondary avenue for boosting its capital.
$1 = 0.9727 Swiss francs Reporting by Michael Shields and Brenna Hughes Neghaiwi; Editing by Mark Potter