RBS avoids break-up with 38 billion pounds 'internal bad bank'

Fri Nov 1, 2013 1:15pm EDT
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By Matt Scuffham and William James

LONDON (Reuters) - Royal Bank of Scotland (RBS.L: Quote) is to create an internal "bad bank" to fence off its riskiest assets, part of a raft of measures designed to heal its relationship with the British government and speed up its eventual privatization.

Britain is keen to offload its stakes in RBS and state-backed rival Lloyds Banking Group (LLOY.L: Quote) as soon as possible, having pumped a combined 66 billion pounds ($106 billion) into the banks to keep them afloat in the 2008 financial crisis.

"I think it does make it easier to sell off the bank and get our money back," Finance Minister George Osborne told the BBC on Friday, adding that a sell-off was unlikely to begin before the next election in 2015.

RBS chairman Philip Hampton, who had previously said the bank could be ready for privatization in 2014, said the timescale for privatization may have been pushed back.

"If it's felt that in order to get the best value you need to have a reliable dividend stream then we're definitely further away from that because of the capital changes and business changes that have taken place," he told reporters.

RBS and the Treasury said they were in advanced talks with the European Commission to free it from a dividend access share - which gives the government rights to an enhanced dividend and makes the bank less attractive to private investors.

Britain began selling shares in Lloyds at a profit earlier this year, but a sale of its 81-percent stake in RBS is much further off, with taxpayers still sitting on a paper loss of nearly 14 billion pounds at current prices. Bankers and political sources have told Reuters it could take three to five years to offload the government's stake.

"The tests for these changes at RBS are whether they see the taxpayer ultimately get its money back and whether they actually boost business lending and radically transform this bank to put an end to business as usual," said Ed Balls, the opposition Labour Party's finance spokesman.   Continued...

People stand near a branch of Royal Bank of Scotland (RBS) in London November 1, 2013. REUTERS/Luke MacGregor