RBS could create ‘bad bank’ for problem loans

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.

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.