By Mark Kleinman, City Editor
Royal Bank of Scotland (RBS) has confirmed plans to hive off nearly £40bn of toxic assets into a new division as part of an effort to accelerate its recovery that will be treated with scepticism by advocates of a more radical break-up.
Announcing a third-quarter pre-tax loss of £634m, RBS said £38bn of impaired loans would be placed into an 'internal bad bank' to be called RBS Capital Resolution Division.
The new arm of the bank is designed to provide a clearer distinction between the clean parts of the business and the tens of billions of pounds of legacy loans that critics say have hampered its ability to play a role in aiding the recovery of the UK economy.
Ross McEwan, RBS's new chief executive, conceded that quickening the run-off of these assets - with a target of up to £25bn of the £38bn being shed by the end of 2015 - would incur steeper losses.
The outcome of the four-month review commissioned by the Chancellor, George Osborne, and conducted by City firms BlackRock and Rothschild will see the rebranding of RBS's existing non-core wing, which has already offloaded hundreds of billions of pounds of toxic loans since the bank's £45.5bn bail-out by UK taxpayers in 2008.
Sky News exclusively revealed details of the internal bad bank plan and the broader restructuring of the bank, which is 81%-owned by taxpayers, last weekend.
Alongside the new bad bank, RBS will also bring forward the disposal of its US retail bank, Citizens; further shrink its investment banking business; resolve the issue of a dividend-blocking instrument that RBS will need to acquire from the Government; and target new cost-cutting measures that could lead to thousands more job cuts.
Mr Osborne said the reforms were part of a broader objective of "creating a banking system that works for Britain".
"Under this new direction RBS will deal decisively with the problems of the past by separating out the good from the bad, and putting the bad loans in a bad bank. Our independent analysis shows that the bad bank should be an internal one, funded by RBS, rather than an external one funded by the taxpayer.
In a pointed remark highlighting divisions between the Treasury and Mr McEwan's predecessor, Stephen Hester, the Chancellor said that the new strategy was jointly-supported by RBS's management, the Government and the regulator.
The Bank of England said that it welcomed "the development of a more focussed strategy for RBS and the commitments of the Board to specific actions that will bolster its capital position in the next three years.
"These actions should create a more resilient institution that is better able to support the real economy without any expectation of further Government support. Given these developments, the Bank of England fully supports the conclusions of the Review published today by HM Treasury."
While there was a consensus about the reforms within Government, Mr Osborne may have to brave a more hostile response from figures who wanted a more radical split of RBS.
Among their ranks were Lord Lawson, the former Chancellor; Sir Mervyn King, former Governor of the Bank of England; and Andrew Tyrie, chairman of the Parliamentary Commission on Banking Standards.
Alongside the new measures aimed at boosting RBS's recovery, a report was published condemning the bank's attitude to lending to small and medium-sized businesses (SMEs).
Mr McEwan pledged to implement the recommendations, and said RBS would target becoming the best SME bank in the UK.
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