Royal Bank of Scotland is expected to confirm it will create a “bad bank” with more than £30 billion ($50 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 considered for the bailed-out bank.
Chancellor George Osborne ordered a review of the taxpayer-backed bank after a parliamentary commission recommended the government consider splitting up RBS.
Mr Osborne is expected to back the bad bank plan after being presented last month with a Rothschild report on the future structure of the lender.
RBS already holds £54 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 break-up 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’s 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 paying dividends.
The results will be the first overseen by RBS’s new chief executive, Ross McEwan. The New Zealander, who was a senior executive at the Commonwealth Bank, wants to launch his own strategic review.
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 will also be expected to give an update on an investigation into 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 others in an $US800 million ($844 million) lawsuit filed in New York by US mortgage lender Fannie Mae.
Fannie Mae is claiming that the banks manipulated borrowing rates, 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 $US5 trillion-a-day foreign exchange market, the Financial Times claimed.