RBS may face huge new bill over loan scandal, UKFI says

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Royal Bank of Scotland could face another huge bill as a result of a US mortgage trading scandal, bosses of the government agency charged with overseeing taxpayers' interests in banks warned yesterday.

They also said RBS needs to beef up its capital and work out where it is going before a sell-off of the majority state-owned bank can be contemplated.

Robin Budenberg, the chairman of UK Financial Investments, said mortgage trading was an "outstanding issue" faced by RBS.

Last week RBS agreed to pay more than $150m (£94m) to settle civil charges which alleged the bank had misled investors in a subprime mortgage product dating from the financial crisis era. JP Morgan last month agreed to pay $5bn to settle a number of cases related to sales of mortgage-backed securities.

Mr Budenberg said that it was "clear that the PRA [Prudential Regulation Authority] is rightly concerned, as is the board of RBS, about these potential liabilities".

James Leigh-Pemberton, the agency's new boss, also weighed in, describing the matter as being "of great concern".

RBS ominously set aside £385m to cover undisclosed legal and regulatory actions at its half-year results in addition to topping up the pool of cash designed to deal with mis-sold payment protection insurance.

Another issue that could engulf the bank is an investigation into allegations that City traders tried to fix Euribor interest rates in a similar manner to Libor rates, which has seen several banks including RBS paying huge fines.

The European Commission's competition watchdogs are currently in the throes of an investigation, and a result could come before the end of the year.

On the subject of privatisation, Mr Leigh-Pemberton, a former senior banker at Credit Suisse, told MPs: "There are certain issues in relation to RBS which absolutely have to be tackled as a precursor to successful reprivatisation."

These, he added, were "sufficient capital; strategic focus on businesses where they enjoy competitive advantage and higher returns; and the normalisation of the capital structure".

Ross McEwan, the new chief executive of RBS, is in the midst of a strategic review, but the results of his work will not be known until February.

However, Mr Leigh-Pemberton, who joined UK Financial Investments in October, thinks that the creation of an internal "bad bank" at RBS containing £38bn of toxic assets could speed up reprivatisation.

"The new plan will enable reprivatisation at least on the timetable that would have been achieved otherwise, and possibly with scope to act a little faster," he told MPs. But Mr Leigh-Pemberton said that markets would have to be "good" and the plan would have to be executed effectively and on time.

The Government recently started to sell off its interest in Lloyds Banking Group, and actually achieved a small profit. However, in June, regulators told RBS that it needed to plug a capital shortfall of £13.6bn, the biggest of any UK bank.

Mr McEwan hopes that a restructuring plan – as part of a process of reshaping the bank – will deal with concerns around its capital strength within the next 2 to 3 years.

RBS shares yesterday closed down 8.2p at 331.6p, still well below the 500p at which the taxpayer would be in profit.