In his annual Mansion House speech, Osborne pledged an “urgent investigation” into whether the bank’s bad loans should be hived off into a separate state-owned entity, leaving RBS to focus on the good parts of its business and helping it to boost lending.
Osborne said he would make the decision by the autumn after carrying out a review this summer.
“With hindsight, I think splitting RBS into a good bank and a bad bank was probably what should have happened in 2008,” he added.
However, CBI director-general John Cridland said the review would simply create uncertainty. “RBS is already well down the road of restructuring, so the case for a split into good and bad banks feels like groundhog day to me and I don’t see how it would help taxpayers in getting their money back.”
The review is likely to have been a factor in RBS chief executive Stephen Hester’s shock decision to quit. Hester opposed a split.
If bad loans are split off into a separate entity, it is likely to consist of Ulster Bank, commercial real estate loans and the non-core units – such as some overseas and investment banking operations. Those would come to a total of around £105bn of assets, roughly 12 per cent of the bank’s total funded balance sheet.
If the bad bank had been set up back in 2009, it would have come in at roughly 30 per cent of a much larger balance sheet, as RBS has been running down those assets for the past five years.
Osborne also instructed RBS to sell off its US retail arm Citizens, with the aim of getting “maximum shareholder value”.
Meanwhile the chancellor revealed he is also closing in on the sale of the government’s stake in Lloyds, as the bank’s shares are trading above the level at which they were bailed out. Osborne said he would appoint a panel of advisers next week to work on the upcoming privatization deal. Osborne plans a sale of a first stake to institutional investors, followed by a series of other sales including some to retail investors.
Osborne also backed the Parliamentary Commission on Banking Standards (PCBS)’s call for senior bankers to face prosecution and jail if banks collapse on their watch and they cannot prove that they did not act recklessly.
The chancellor said the Office of Fair Trading (OFT) would also bring forward a review examining competition in banking for small and medium businesses, as recommended by the PCBS.
At the same event outgoing Bank of England governor Lord King said the Bank is making good progress on financial stability, resolving emerging problems before they reach crisis levels. But he also called again for more stimulus.
“Our major banks all now have plans for actions to fill their capital shortfall,” he said of the Bank’s major programme reviewing lenders’ capital positions. “By taking firm pre-emptive action, we have shown what the new judgement-led approach to supervision means in practice.”
“We need not more but better regulation and, just as with monetary policy, we have changed the way regulatory decisions are made.”
During his speech, Osborne announced that King would be given a peerage, elevating him to the House of Lords. The long-serving governor, whose final term at the Bank finishes at the end of this month, was knighted by the Queen two years ago for services to banking.