By By Mark Kleinman, City Editor
The Treasury is examining proposals for a 'bad bank' at Royal Bank of Scotland (RBS) that would contain just £30bn of toxic loans, less than one-third of the sum originally envisaged by ministers seeking to bolster its role in reviving the British economy.
Sky News understands that the idea is among a range of asset pools currently under consideration as part of the review that was commissioned by George Osborne, the Chancellor, in June, and which is due to report its findings later this month.
The fact that such a comparatively modest portfolio is being seriously considered as the basis of an RBS 'bad bank' has surprised some of those involved in the project and has led some analysts to question whether such an initiative could be worthwhile.
It also highlights the quandary confronting Mr Osborne as he comes under pressure from MPs to commit to a break-up of RBS, which was rescued by UK taxpayers in 2008 at a cost of £45.5bn.
Some parliamentarians, as well as Sir Mervyn King, former Governor of the Bank of England, have been pushing for the creation of a state-owned bad bank because of their conviction that it would allow the cleaner part of RBS to step up its lending to UK businesses.
People close to the review say that the £30bn bad bank proposal would consist primarily of assets from Ulster Bank, RBS's Irish subsidiary, and the Global Restructuring Group that houses many of the loans to British companies that turned sour during the financial crisis.
It would, however, contain few assets from RBS's non-core division, which has already been radically slimmed down since 2008.
One person familiar with the deliberations said it would be "virtually impossible" for such a small carve-out to achieve Mr Osborne's objectives, which he outlined during his Mansion House speech earlier in the summer.
"We'll look at a broad range of RBS's assets, but particularly assets in Ulster Bank and UK commercial real estate. We're not prepared to put more taxpayer capital into RBS as part of this process," he said.
"We will establish a Bad Bank if it meets our three objectives: if it supports the British economy; if it's in the interests of taxpayers – and if it accelerates the return to private ownership. But if the review reveals that it would not achieve these things, then we won't do it."
Even if Mr Osborne does back the idea of a bad bank, however, the decision would rest with RBS's independent shareholders because UK Financial Investments, which manages the Treasury's stake, would be excluded from voting on the separation.
The other asset pools being considered by the Treasury and its external advisers at Rothschild and BlackRock are considerably larger, but even the largest contains only a fraction of the £325bn of loans insured by RBS in the Asset Protection Scheme until last year.
A 'no' vote would leave the Treasury at odds with the Parliamentary Commission on Banking Standards, whose chairman, Andrew Tyrie, called last month for the bad bank review to be both independent and rigorous.
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