* Assets worth up to 120 bln stg could be hived off - source
* Much of Ulster Bank could land in 'bad bank' - source
* Complexity, expense, state aid rules seen as obstacles
* Treasury to review options with 'external support'
By Matt Scuffham
LONDON, June 20 Britain would face big obstacles
to a break up of state-controlled Royal Bank of Scotland
and such a step might not achieve its ultimate aim of boosting
lending to the economy, analysts and investors said.
Britain's government has come under pressure to consider
splitting the 82 percent state-owned bank partly because
prospects for returning it to private ownership soon still seem
remote five years on from its 45.5 billion pound ($71.25
billion) rescue in the financial crisis.
The plan, backed by former British finance minister Nigel
Lawson and outgoing Bank of England governor Mervyn King, has
gained support because it has taken longer for RBS to return to
financial health than expected while lending to the economy
across British banks as whole remains sluggish.
But analysts and investors believe a break up would be a
costly, complex and lengthy process that would not necessarily
benefit the economy or taxpayers.
"The decisions to seriously consider a break-up into
good/bad bank will further increase the uncertainty about the
future shape of RBS, especially as the Chancellor (George
Osborne) expects the bank to support core UK businesses," said
Espirito Santo analyst Shailesh Raikundlia.
One of RBS's ten biggest investors warned the move could
damage the wider economy.
"RBS's record on new lending in the UK mortgage market is
already very strong," the investor said. "It is possible that
the capital strain of a split could produce the reverse effect
from that intended, that is it could actually cause less lending
to the UK economy."
Finance minister George Osborne has said the government
would investigate the case for hiving off RBS's toxic loans into
a "bad bank", leaving a "good bank" better placed to lend to
British households and businesses. Osborne said any break-up
would not involve taxpayers putting in further funds.
Both Ireland and Spain have gone down the "bad bank" route
to tackle their banks' bad assets.
COST AND COMPLEXITY
The Conservative-led coalition is considering hiving off RBS
assets worth between 100 billion pounds and 120 billion pounds,
according to one source familiar with the matter.
Ulster Bank, owned by RBS, could have its non-core assets
and commercial real estate assets moved into the bad bank
following a break up, along with some UK commercial real estate
assets of RBS, the source said.
Osborne, himself, had previously rejected the idea, also
citing the cost and complexity involved. Critics have pointed
out that it would cost billions of pounds just to buy out the
bank's minority shareholders, which would have to happen before
the break-up could take place.
In his annual speech to City of London financiers on
Wednesday, Osborne said, with hindsight, RBS should have been
broken up five years ago. He stopped short of criticising his
Labour predecessor, Alistair Darling, who was in power at the
time, admitting he had not proposed such a move in opposition.
The Parliamentary Commission on Banking Standards, which was
set up by Osborne to review the industry, had called on the
Treasury to produce a report on the pros and cons of a break-up
by September, a recommendation the Chancellor has heeded.
Osborne said Britain would establish an RBS "bad bank" if
the review concluded the move would support the British economy,
be in the interests of taxpayers and accelerate the bank's
return to private ownership.
The review will be undertaken by the Treasury with external
support and will report back by the autumn. It is not yet clear
whether that support would come from individuals or a financial
RBS has already undertaken a mammoth restructuring, overseen
by outgoing Chief Executive Stephen Hester since its rescue,
shedding some 900 billion pounds of non-core assets but it still
has assets worth around 1.2 trillion pounds.
In contrast to RBS, the government has said it is ready to
start selling its holding in rival Lloyds, also bailed
out in the crisis, allowing it to claim partial success in
returning the banks to health ahead of the next election in