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MPs to spark backlash by saying RBS should be broken up

Commission on collision course as it pursues split into 'good' and 'bad' banks

Royal Bank of Scotland should be split into a “good” bank, shorn of billions of pounds of risky and non-performing loans, and a “bad” bank, according to early drafts of the final report of the Parliamentary Commission on Banking Standards.

The so-called "nuclear option" of a break-up of the taxpayer-owned bank is being actively pursued by at least two members of the commission: Lord Lawson, the former chancellor, and the Archbishop of Canterbury, Justin Welby.

Advocates of a break-up argue that it could facilitate a more rapid privatisation, and encourage the "good" bank to lend more to Britain's small businesses, which are struggling as a result of being starved of credit.

However, The Independent has learnt that at least five members of the commission believe a detailed cost- benefit analysis should be pursued before taking such a step. They include its highly respected chairman, Andrew Tyrie, and four other MPs.

The Government is against any such proposal as it would first involve a complete nationalisation of the bank. The Chancellor, George Osborne, has claimed it would cost a further £8bn to £10bn to buy the 18 per cent of RBS not owned by the taxpayer and take up to three years to implement such a project.

He told Lord Lawson: "The obstacles to your approach are very considerable ... One has to ask whether the benefits of that two or three-year process would greatly outweigh the benefits of the current strategy."

Any such move would also be met with fierce resistance from RBS's directors, who have been arguing for a sale of the taxpayer's holding at the earliest possible opportunity. They believe that a split would inevitably lead to delay.

The bank declined to comment yesterday, but it has previously argued that RBS has made "huge progress" and expects to be in shape for privatisation without the need for any more government cash.

The company is also expected to warn ministers that a break-up wouldn't necessarily increase lending, while splitting RBS into a "good" and "bad" bank could leave the taxpayer saddled with a substantial pool of bad or risky assets on which it could take many years to generate a return.

One industry source said: "Before more taxpayers' money is committed to bailing out banks again, we should all be clear that the prize is worth the drag on public finances."

The 10-strong commission has just received the draft version of the final report, which includes Lord Lawson's views on RBS. Its members will read the draft and early next week begin to turn that into a final version, which could be published towards the middle of the month, possibly ahead of Mr Osborne's Mansion House speech on 19 June. There is no certainty that Lord Lawson's position, which is also backed by Sir Mervyn King, the outgoing Governor of the Bank of England, will be in the final report.

The Archbishop, a former oil executive, favours a different form of break- under which RBS would be split into a series of regional banks.