Royal Bank of Scotland could create an internal 'bad bank' to house more of its problem loans, even if Britain decides not to enforce a breakup of the part-nationalised lender, banking industry and political sources say.
Reuters reports that Britain's finance ministry, aided by investment bank Rothschild, is close to concluding a review into whether RBS, 81% owned by taxpayers, should be made to hive off its soured assets into a separate legal entity. It is expected to make its recommendations known in early October, sources said.
Analysts expect the Treasury to decide against recommending a breakup. They argue it is not needed since RBS has already wound down or sold off the vast majority of its bad loans and that European state aid rules and the need for approval from RBS's minority investors would make the plan unworkable.
Advocates of a breakup, including former Bank of England Governor Mervyn King and ex-UK finance minister Nigel Lawson, say it will leave the bank, rescued through $72.7bn (£45.5bn) 2008 government bailout, better placed to lend and support the UK economy.
If the idea is rejected, RBS, which is intensely scrutinised by lawmakers and regulators, could try to appease critics by forming an internal bad bank without government intervention.
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