Government braced for September deadline on resolving future of RBS

The Commission on Banking Standards is expected to suggest that the Treasury report back at the latest by September on how to resolve the future of RBS, reports The Telegraph.

Among the options suggested in its report will be proposals to split RBS into several regional lenders; the separation of the bank into a “good bank” and “bad bank”; and handing out shares in the business to the public.

According to sources close to the commission, the report – currently at the draft stage – is expected to say that the current strategy of running the bank, which is 81pc owned by the state, is no longer sustainable and that the Government must consider “more radical options” for the business.

Splitting up RBS would be controversial and George Osborne, the Chancellor, has made clear he is not in favour of such a dramatic restructuring of a bank that, despite scaling back its operations since the financial crisis, remains one of the country’s biggest lenders to small businesses and homebuyers.

Sources close to the bank revealed that Stephen Hester, the RBS chief executive, has been given assurances by the Treasury that the “good bank/bad bank” split was unlikely to happen as it would delay the privatisation process and could cost up to £10bn.

Mr Hester sees the re-privatisation of the bank as a key target. He is known to believe that the present strategy of running down poorly performing assets is progressing well and that a separation of the bank would be an unnecessary distraction.

Treasury sources insisted that the Government still had an open mind on the issue, although splitting up the bank would cause a number of practical problems.

Mr Osborne said at the time of the International Monetary Fund Article IV report on the UK economy that he would await any findings from the commission before the Treasury would come to any definite conclusions.

He has already indicated that he expects RBS to become a more “UK-focused” business as it shuts large parts of its investment banking arm, as well as selling off several major businesses.

Earlier this year, RBS said it would be spinning out its Citizens US retail banking arm. The sale of Citizens is expected to begin within two years and Bruce van Saun, RBS’s finance director, is expected to join the bank later this year as its new chief executive.

Last month, regulators confirmed that RBS would not need to sell any new shares to meet a capital shortfall on its balance sheet, having announced a series of disposals and internal restructurings that were aimed at avoiding the need for any more public money being put into the bank.

Sir Philip Hampton, chairman of RBS, told shareholders last month that he thought the first sale of the bank’s shares by the state could begin as early as next year.

Lloyds Banking Group, which is 39pc owned by the taxpayer, is considered much closer to a first sale by the state and senior insiders are privately planning on a deal as early as within the next couple of months and certainly before the end of the year.

Shares in RBS closed up 2.8pc yesterday at 335.4p, valuing the bank at £37.6bn. The shares are still well off the level at which the Government would be expected to launch a sale, with most analysts believing the stock would need to hit a minimum of 400p. To break even, RBS shares need to reach a price of at least 500p.

Antony Jenkins, chief executive of Barclays, warned on Tuesday of difficult times ahead in the UK retail banking market. Speaking at a conference in New York, he said increased regulation and higher capital requirements had made consumer banking “tough”.

Mr Jenkins added that the Co-op Bank, which has faced questions over its future after its debt was downgraded to “junk” status last month by Moody’s, was likely to struggle. “The Co-op is a great example of a worthy institution with a lot of longevity in the UK that’s found that banking is quite challenging,” he said.