RBS 'bad bank' Q&A: how does new plan help the taxpayer?
Royal Bank of Scotland announces plan to put riskiest assets in an internal ring-fenced 'bad bank'
THE Royal Bank of Scotland will create an internal "bad bank", ring-fencing £38bn of its riskiest assets, such as loans that it does not expect to be repaid. The government, which owns 81 per cent of RBS following a massive bailout at the height of the financial crisis, says the move will be a step towards returning the money invested by the British taxpayer. So how exactly will it work?
Is RBS being split up?
No. The Parliamentary Commission on Banking Standards initially suggested that RBS's toxic loans should be removed from the bank and kept in the public sector for the foreseeable future. But Chancellor George Osborne has shied away from a split following a Treasury-backed review into its potential break-up.
What is being proposed instead?
The riskier assets will be kept within RBS but ring-fenced in a "bad bank" called RBS Capital Resolution Group. The new internal, but separately managed, "bad bank" is seen as the least disruptive of three break-up options looked at by the Treasury-backed review. The plan is to run down the portfolio within the next three years. The bank has also announced plans today to increase loans to small and medium businesses following an independent review by the former Bank of England deputy governor Andrew Large, which found that the bank had failed to support small businesses.
What is the aim of the "bad bank"?
The plan is designed to draw a clean line under the bank's past problems to pave the way for a return to private ownership. The idea, says Robert Peston, the BBC's business editor, is that when the riskiest assets are all gone, RBS "will feel liberated". The "sheer poisonous quality" of these loans means they consume a fifth of RBS's capital, says Peston, which means that money is not available to support new credit and healthy credit creation.
Are there any drawbacks?
The faster run-down of bad assets will accelerate and increase losses on the "bad" loans. The bank therefore expects to take an impairment charge of between £4bn and £4.5bn in the current quarter. However, the bank says that restructuring will free up between £10bn and £11bn of capital, leaving it better placed to lend.
What has been the reaction so far?
Shares in RBS dropped 2.2 per cent to 358.2p this morning, the biggest single loss on London's FTSE 100 today. But the Financial Times says this is also partly due to investors absorbing the news of the bank's "alarming" third quarter losses. RBS announced a pre-tax loss of £634m for the third quarter today and said it had set aside £250m to cover claims from individuals who were miss-sold PPI. Meanwhile, Osborne has been on Radio 4's /Today/ programme insisting the creation of the "bad bank" will allow RBS to become a "boost to the British economy instead of a burden". He said the move will make it easier to sell off the bank and recover the money that the British taxpayer put in, although he said this is unlikely to happen before the next general election. ·