George Osborne to reject call to split RBS

A draft report from the Parliamentary Commission on Banking Standards is understood to include the radical option, whose supporters include former Tory Chancellor Lord Lawson of Blaby, and Sir Mervyn King, outgoing governor of the Bank of England.

But it is believed Osborne will dismiss the idea, maintaining that such a good/bad bank option would be time-consuming, complex and risky even if providing a route back to the eventual re-privatisation of the bank.

It would also be likely to spark political controversy after the British taxpayer pumped £45 billion into RBS in a bail-out.

RBS chief executive Stephen Hester is four years into a five-year turnaround of the bank and believes a sale of the 81 per cent state holding could start from next year.

Political and industry sources said yesterday that the banking commission, chaired by Andrew Tyrie, also chairman of the Treasury select committee, was unlikely to make outright recommendations to Osborne.

But the commission is likely to at least suggest that a division of the Scottish bank would allow its toxic assets to be ringfenced from its profitable business, freeing it to boost lending to businesses and households that would help stimulate economic recovery.

Osborne set up the cross-party commission last year to look at ethics in banking, after Barclays was fined over the rigging of global interest rate benchmarks.

Yet some members are understood to be reluctant to forcefully recommend a banking split because it took little public evidence on the issue.

A Treasury spokesman said yesterday: “As the Chancellor has said, we need functioning banks supporting the real economy instead of nursing their wounds, and we will set out the way ahead once the commission has completed its work.”

Members of the commission, which also include Justin Welby, the Archbishop of Canterbury, are reviewing a final draft of their 600-page report and will meet early next week to debate its final form.

The final report is due later in June, amid speculation that it may be unveidled before the Chancellor’s keynote Mansion House speech at the Guildhall on 19 June.

But sources yesterday cited Osborne’s previous scepticism about the value of a good and bad bank split, including comments at at a meeting of the commission in February.

The Chancellor, in exchanges with Lawson, said: “First, we’d have to nationalise the Royal Bank of Scotland. I’d have to go to the House of Commons...and justify spending several billion pounds, perhaps up to £8bn, £9bn or £10bn, on nationalising the Royal Bank of Scotland. I have to buy out the minority shareholders at a presumably independently agreed market price.”

Osborne said he would have to explain to Parliament why he spent “a lot of money nationalising RBS”, and then go through the “complex process” of a good bank/bad bank split.