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RBS "bad bank" for problem assets
Chancellor George Osborne is under pressure to boost lending to the economy and speed up RBS's return to the private sector.
Royal Bank of Scotland is to create an internal "bad bank" of £38 billion of problem assets but avoid a full split, the bank and the Treasury have announced.
The 81% state-owned lender revealed the outcome of a four-month review into its future as it said operating profits more than halved to £438 million in the third quarter on a year earlier.
RBS avoided a threatened carve-up and nationalisation of its problem loans, and will instead run down the assets at a faster rate.
New chief executive Ross McEwan has also started a full review of the lender which will report back in February, and is to speed up the sale of its Citizens US banking subsidiary, with a partial flotation next year.
Mr McEwan said the plan will "create a bank that can reward the faith of UK taxpayers and all our investors".
Chancellor George Osborne said RBS's new focus will see it being a "boost to the British economy instead of a burden".
RBS will make a substantial loss this year as the faster run-down of assets in the internal bad bank will cause an accounting write-down of up to £4.5 billion.
And when including one-off items and an additional charge of £250 million to cover redress for the mis-selling of payment protection insurance (PPI), RBS made a bottom-line loss of £634 million in today's third quarter results.
The bank has also reportedly suspended two traders in its foreign exchange arm as regulators clamp down on manipulation of currency markets.
Mr McEwan refused to comment on the case but said it will "come down very severely on anyone we discover has been breaking the rules".
Today's announcement also coincided with a scathing report by Sir Andrew Large on the bank's lending to small and medium-sized firms.
It found a host of problems in the way RBS treats these customers - including long delays on approving loans.
Mr McEwan said the bank accepted the report and will address the issues in its review.
The internal bad bank aims to run down up to 70% of the toxic assets within two years, and will contain about £9 billion of assets from Ulster Bank, as well as problem commercial property loans.
The future of Ulster Bank, a major lender in Northern Ireland and the Republic of Ireland, will be decided in the review. Mr McEwan refused to say whether its cost-cutting plans will entail heavy job losses.
The outcome of the long-awaited report into splitting the bank, which needed a £45 billion taxpayer bailout in 2008, was welcomed by the Bank of England.
It said: "These actions should create a more resilient institution that is better able to support the real economy without any expectation of further Government support."
It appeared to mark a change of tack from the central bank, after former Bank of England governor Sir Mervyn King backed a full split of the lender.
The Treasury also said taxpayer support for the lender has been reduced by another £8 billion after the so-called Contingent Capital Facility was removed a year early.
It is also in talks with the European Commission on speeding up a return to dividend payouts - by removing the Dividend Access Share.