EU approves RBS bail-out but issues warning on asset sales

Published on Monday 14 December 2009 20:26

THE European Union yesterday approved the £20 billion bail-out of Royal Bank of Scotland but repeated a warning that it would force further asset sell-offs if RBS does not shrink its operations by 2013.

The EU delivered its verdict ahead of a crucial meeting in Edinburgh today where RBS shareholders will vote on entry to the government's Asset Protection Scheme. The EU gave its backing to the APS, saying it was necessary to remedy a serious disturbance in the British economy.

European competition commissioner Neelie Kroes wished RBS a "better and more sustainable future" but used the opportunity to issue another stern warning that the bank must meet the 2013 deadline or face further punishment.

Kroes said: "The commission will be able to intervene again and more divestments will be required."

The EU ruled last month that RBS must sell 318 branches in the UK – 2 per cent of its UK market share. It will lose the NatWest brand in Scotland and its Williams & Glyn's network in England and Wales.

RBS's insurance business, which includes the brands Churchill, Direct Line, Privilege and Green Flag, will also be broken up.

RBS chief executive Stephen Hester said at the time that the measures "don't improve competition and don't improve our ability to pay back the shareholder – ie: the taxpayer".

A spokesman for RBS said yesterday: "This is a further key milestone in the radical restructuring we are undertaking to return RBS to standalone strength."

City minister Lord Myners said: "After requiring significant taxpayer support, RBS can now get on with the task of planning for its future and working to give the public a good return on its investment in the bank."

Myners added: "The divestments that RBS will make in the years ahead will be part of the biggest shake-up in high street banking this country has seen in decades.

"Together with the eventual sale of Northern Rock and divestments from Lloyds, we could have three new banks operating on the high street within four years."

RBS shareholders are today expected to approve the bank's entry into the APS although it is likely the RBS board will face tough questions over bonuses. Under the terms of the APS, the RBS board will be forced to hand over the final say on 2009 bonuses to UKFI, the government agency that manages the taxpayer's stake in bailed-out banks.

The RBS board threatened to resign if the government makes a political scapegoat of the bank and limits bonuses to the extent that it is likely to spark a mass exodus of talented staff.

The APS will act as a giant insurance policy for RBS's toxic debts, which were once valued at 282bn.

If approved, the government will increase its stake from 70 per cent to 84 per cent in return for pumping in a further 25.5bn. RBS has also been promised access to an extra 8bn in the event that it runs into more trouble.