RBS to create 'bad bank' for toxic assets

Royal Bank of Scotland is expected to confirm that it is to create a "bad bank" with more than £30 billion of assets, following a review of its operations ordered by the British Treasury.
By · 2 Nov 2013
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2 Nov 2013
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Royal Bank of Scotland is expected to confirm that it is to create a "bad bank" with more than £30 billion of assets, following a review of its operations ordered by the British Treasury.

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.
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