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Bank of England governor Mervyn King said Wednesday that the British government should split the Royal Bank of Scotland into "good" and "bad" bank divisions to return it more quickly to the private sector.
King argued that state-rescued RBS needed a "decisive restructuring" in comments before the Parliamentary Commission on Banking Standards, which was set up to report on professional standards and culture in Britain's banks.
The BoE chief told lawmakers that RBS was holding the wider economy back, and added that it was "not beyond the wit of man" to split RBS into a "good" and "bad" bank to ensure it would aid recovery and boost lending.
"The lessons of history is that we should face up to it -- it's worth less than we thought and we should accept that and get back to finding a way to create a new RBS that could be a major lender to the UK economy," said King, who will be replaced as the central bank's head by Canadian Mark Carney in July.
RBS, which remains 81-percent state-owned after a vast state bailout, had last week posted a net loss of almost £6.0 billion (6.9 billion euros, $9.0 billion) for 2012. That was the bank's fifth successive annual loss.
The lender was rescued at the height of the global financial crisis in 2008 with £45.5 billion of taxpayers' cash.
RBS chief executive Stephen Hester had insisted last Thursday that its return to the private sector was on track and could be completed within two years.
However, King said Wednesday that it was "nonsense" to think the government could run the bank at arm's length, adding that he had discussed the matter with finance minister George Osborne.
"Time has passed and aside from reducing the balance sheet, nothing has been achieved -- we haven't managed to get it into the private sector," noted the BoE chief.
"It would be much better to accept that it should have been a temporary period only, and the longer this goes on, the more difficult it becomes."
RBS was plagued last year by compensation payouts for mis-selling, Libor rate-rigging fines and a vast accounting charge.
Losses after taxation widened to £5.97 billion last year, compared with a shortfall of £1.997 billion in 2011.
RBS was sunk by its badly-timed consortium takeover of Dutch bank ABN Amro at the top of the market in 2007, just before the financial crisis struck.