George Osborne has asked Treasury officials to review the case for splitting the Royal Bank of Scotland into a good bank and a bad bank. His action follows a recommendation by the independent Parliamentary Commission on Banking Standards that the government should consider acquiring severely impaired assets from RBS. This is presented as an approach that would encourage the “good” RBS to increase lending to the UK economy, and as a prelude to the sale of the taxpayer stake in the bank. The chancellor can save his officials a great deal of time – and avoid the consequences of blighting RBS with continuing uncertainty – if he accepts that such a strategy is not worth pursuing.
There have been three occasions when a division along these lines might have made sense. The Labour government considered such a split when it first recapitalised RBS in October 2008; and again in the spring of 2009 when the Asset Protection Scheme, under which the state underwrote the value of some bank assets, was introduced to provide further support. It rejected the option because it would have involved nationalisation of RBS – a toxic notion for a centre-left government – and may well have deflected depositor and investor concerns to the next most vulnerable bank. Mr Osborne could and should have considered this option when the coalition government came into office in May 2010 – but there is no evidence that he did.
Any good-bad split that Mr Osborne does now consider is likely to be limited in scope, in part because any assets transferred from RBS to the government would likely be added to the national debt: for instance, moving ￡15bn of assets would add almost a percentage point to the nation’s debt ratio. The political and market sensitivity of the UK’s debt statistics mean that the government would probably consider transferring to public ownership only a relatively small and homogenous pool of assets. Some ￡50bn of commercial property loans and Irish mortgages are the most obvious targets for a bad bank.