RBS to create 'bad bank' for toxic assets
The taxpayer-backed lender is to say that a new separately managed bad bank will be established to deal with the legacy of its toxic assets - the least disruptive of three break-up options being looked at for the bailed-out bank.
Chancellor George Osborne ordered a review of the bank after a parliamentary commission recommended the government consider splitting up RBS. Mr Osborne is expected to give his backing to the bad bank plan after being presented last month with the report by Rothschild on the future structure of the lender.
RBS already holds £54 billion ($91 billion) of toxic assets in its existing "non-core" division, but the new bad bank unit could contain as little as £35 billion of legacy assets.
Among the options understood to have been turned down was a more radical breakup that would have involved setting up a new state-backed body into which RBS could have put tens of billions of pounds of its bad assets.
The bad bank announcement will come alongside the release of RBS' third-quarter financial results, which are expected to show it made a pre-tax profit of £400 million, reversing a loss in the same period last year of £1.2 billion.
The return to profit is likely to increase the focus on RBS' inability to pay dividends and the bank is expected to confirm it is in talks to pay back the £1.5-billion so-called Dividend Access Share that prevents it from making payouts to shareholders.
The results will be the first overseen by RBS' new chief executive, Ross McEwan, who took over from Stephen Hester in September. Among the other issues likely to be under the spotlight will be further mis-selling provisions as well as investigations into potential wrongdoing by RBS staff. RBS has already set aside billions of pounds for payment protection insurance and interest rate swap mis-selling, but could announce further charges.
The bank is also expected to give an update on an investigation into potential manipulation of the foreign exchange market after admitting it was co-operating with an international inquiry into the allegations.
RBS has already settled with the US and British authorities over its role in Libor-rigging. However, the bank this week was named along with eight other banks in an $US800-million lawsuit filed in New York by US mortgage lender Fannie Mae. Fannie Mae is claiming the RBS, along with other banks including Barclays, manipulated global borrowing rates at its expense, costing it hundreds of millions of dollars in losses on interest rate swaps taken out to hedge its exposure to movements in rates.
Meanwhile, RBS has suspended two traders in connection with a worldwide probe into the possible manipulation of the $5 trillion-a-day foreign exchange market, the Financial Times claimed. British, US and Swiss regulators are investigating whether banks colluded to set rates. RBS declined to comment.
Frequently Asked Questions about this Article…
A 'bad bank' is a separate entity created to hold and manage toxic assets, which are difficult to sell or have lost value. RBS is creating a bad bank to manage over £30 billion of its toxic assets, following a review by the British Treasury. This move aims to isolate these risky assets and improve the bank's overall financial health.
A 'bad bank' is a separate entity created to hold and manage toxic assets, allowing the main bank to focus on its core operations. RBS is creating a bad bank to manage over £30 billion of toxic assets, following a review by the British Treasury to address its legacy issues.
The creation of a bad bank is expected to help RBS manage its toxic assets more effectively, potentially leading to improved financial performance. The bank's third-quarter results are anticipated to show a pre-tax profit of £400 million, a significant turnaround from a £1.2 billion loss in the same period last year.
The creation of a bad bank is expected to help RBS improve its financial health by isolating toxic assets, which can lead to a clearer focus on profitable operations. This move comes as RBS reports a return to profit, with a pre-tax profit of £400 million in the third quarter.
RBS's return to profitability may increase focus on its inability to pay dividends. The bank is in discussions to repay the £1.5 billion Dividend Access Share, which currently prevents it from making payouts to shareholders. Resolving this issue could pave the way for future dividend payments.
For RBS shareholders, the establishment of a bad bank could potentially lead to a more stable and profitable core bank. However, RBS is still unable to pay dividends due to a £1.5 billion Dividend Access Share, which it is in talks to repay.
The changes at RBS are being overseen by the new chief executive, Ross McEwan, who took over in September. His priorities include managing the bank's toxic assets through the bad bank, addressing mis-selling provisions, and cooperating with investigations into potential wrongdoing by RBS staff.
While the bad bank strategy aims to manage toxic assets effectively, there are risks such as the potential for further financial losses if the assets do not perform as expected. Additionally, ongoing investigations and legal issues could impact RBS's reputation and financial standing.
RBS is facing several legal challenges, including a $US800-million lawsuit filed by Fannie Mae, which alleges that RBS and other banks manipulated global borrowing rates. Additionally, RBS is involved in a worldwide probe into potential manipulation of the foreign exchange market.
RBS considered more radical options, such as setting up a new state-backed body to manage bad assets. However, the bad bank strategy was chosen as the least disruptive option, allowing RBS to manage its toxic assets separately while maintaining its core operations.
RBS has set aside billions of pounds to address past mis-selling issues, including payment protection insurance and interest rate swap mis-selling. The bank may announce further charges as it continues to resolve these issues.
RBS is facing several legal challenges, including a lawsuit filed by Fannie Mae alleging manipulation of global borrowing rates. Additionally, RBS is involved in investigations into potential foreign exchange market manipulation and has settled with authorities over Libor-rigging.
RBS's cooperation with international inquiries, such as the investigation into foreign exchange market manipulation, demonstrates its commitment to transparency and compliance. This cooperation is crucial for rebuilding trust with regulators and investors.
Ross McEwan is the new chief executive of RBS, having taken over from Stephen Hester in September. His priorities include overseeing the bank's return to profitability, managing the bad bank strategy, and addressing ongoing legal and regulatory challenges.
RBS's restructuring efforts, including the creation of a bad bank, aim to stabilize the bank's financial position and improve profitability. For investors, these efforts could lead to a more robust and resilient bank, potentially resulting in better returns and the possibility of future dividend payments.
RBS's third-quarter financial results are expected to show a pre-tax profit of £400 million, reversing a loss from the previous year. This positive outcome may increase focus on RBS's inability to pay dividends and its efforts to repay the Dividend Access Share.
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