The idea of splitting Royal Bank of Scotland into a “good bank” – ripe for reprivatisation – and a state-run “bad bank” holding RBS’s toxic assets has been raised as an option in a draft report on banking standards.
However, sources on Andrew Tyrie’s parliamentary banking commission say the good/bad bank split is not a firm recommendation but reflects the enthusiasm of some of the 10-member team for the idea.
According to someone who has seen the draft, the report says that the current strategy for RBS is not working and does not serve the economy well. The commission calls on the government to consider all the options, including various break-up ideas, and to come up with a new plan by September.
A state-owned bad bank might take on an estimated £60bn-£80bn of assets from RBS, according to bankers. In addition to the group’s existing portfolio of “non-core” assets, projected to fall to about £40bn by the year-end, close to half of RBS’s Irish subsidiary Ulster Bank, with assets of about £40bn, could be transferred, alongside other troubled eurozone exposures and a slug of non-performing commercial property lending.
Lord Lawson, former Conservative chancellor, is among the peers and MPs who support the split, which he believes would accelerate the bank’s return to full health – a view shared by Sir Mervyn King, Bank of England governor, who is not on the commission.
Justin Welby, Archbishop of Canterbury, is another commission member attracted to the idea of taking a big bank – many assume he means RBS – and turning it into a series of regional banks.
Mr Tyrie, the commission chairman, will proceed by consensus, however, and people close to the committee do not expect a wholehearted endorsement of an RBS split in the final report.
That would come as a considerable relief to George Osborne, chancellor, who argues that the split would require him to fully nationalise the bank – at a cost of up to £10bn – while he is anxious to privatise it.
Downing St said on Tuesday that David Cameron wanted to see RBS “returned to full private ownership”– a process which he said last month he was keen should happen “as soon as possible”. RBS chairman Sir Philip Hampton has said the bank would be ready for privatisation next year.
Mr Osborne wants to avoid a high-profile clash with advocates of a good bank/bad bank split – including Lord Lawson and Sir Mervyn – and his aides say the idea is “perfectly reasonable” in principle and that he has an “open mind” on the subject. But he told Mr Tyrie’s commission that a split would be complex and time-consuming, possibly taking as long as 18 months to effect – and potentially derailing any effort to reprivatise RBS before the 2015 general election.
Those close to the banking commission say the final report may suggest that Mr Osborne should publish a full cost-benefit analysis to assess whether such a split makes sense.
UK Financial Investments, the Treasury arm that runs the government’s shareholdings including its 82 per cent RBS stake, has spent recent months engaged in just such a process, albeit on an informal basis, officials say.
However, the UKFI exercise is seen by some as a means to defend the status quo rather than engage in a costly and time-consuming split.
Members of the commission received a first draft report over the weekend and are hoping to finalise its conclusions at a meeting next Tuesday, with possible publication later next week.
Additional reporting by Brooke Masters
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