Whether the Royal Bank of Scotland (RBS) will be split into a good/bad bank has dogged the company ever since it became obvious that large parts of its loan book - which effectively means Ulster Bank - were heavily underperforming. Management, in a move that was presumably signed off by the government, has tried to find a middle course between cleaning up the balance sheet and avoiding the break-up of the bank. It seems that the solution to this problem is to create an internally managed bad bank.
Newly installed chief executive Ross McEwan said the bank had identified £38bn of the worst assets on its balance sheet, which consume about 20 per cent of its capital, and spin these into a new internally managed bad bank. Management aims to run this portfolio down over the next three years but there will be an immediate cost in terms of a heavy reported loss for the year after an impairment charge of about £4bn is booked in the fourth quarter. The move also chimes with management's plan to raise the company's capital thresholds to more than 12 per cent by the end of 2016.
This is being done for three clear reasons: Firstly, RBS underlying is not performing well enough to lift capital on its own - impariments have fallen but revenue growth remains flat. Secondly, UK regulators have given themselves capital varying powers over institutions deemed systemically important to the UK economy. Thirdly, there are still unquantifiable losses to come from investigations into past malpractice in the industry.
