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British finance minister George Osborne on Wednesday ordered a review into whether state-rescued Royal Bank of Scotland should be split into 'good' and 'bad' banks, with the latter housing written-off assets, as part of the government's plan to return RBS to the private sector.
Chancellor of the Exchequer Osborne, addressing business leaders in London, added that the coalition government was also considering options for selling its stake in Lloyds Banking Group (LBG), which like RBS won a massive state bailout following the 2008 global financial crisis.
"I can tell you today that we will urgently investigate the case for taking the bad assets -- those mistakes of the past -- out of RBS," Osborne said in his Mansion House speech -- an address given annually by the chancellor to the City of London financial centre.
"We will judge whether this will allow the Bank to focus on its future supporting the British economy. We will see whether it's right for Britain to, in effect, see RBS broken up."
Osborne said the review would be carried out swiftly by the Treasury and outside support.
"We will establish a bad bank if it meets our three objectives: if it supports the British economy; if it's in the interests of taxpayers; and if it accelerates the return to private ownership," he said.
The finance minister suggested that the bank's failing assets should have been spun off at the time of the crisis.
"With hindsight, I think splitting RBS into a Good Bank and a Bad Bank was probably what should have happened in 2008," he remarked.
"I wasn't in office. I didn't suggest it in opposition. And I'm not criticizing my predecessor who had to act quickly in a desperate situation," he added.
RBS, 81-percent owned by the government, has been left rocked after chief executive Stephen Hester last week announced that he was stepping down after five years in the role.
Hester's exit due later this year sent shockwaves through Britain's financial sector because he had previously said that he wanted to complete the Edinburgh-based bank's difficult journey out of government ownership back to the private sector.
Analysts believe that Osborne wanted a new face to help guide Royal Bank of Scotland's return to private ownership, which is not expected until late 2014 at the earliest.
RBS was rescued with £45.5 billion ($71.3 billion, 53.5 billion euros) of taxpayer cash at the height of the 2008 global financial crisis under the then-Labour government, making it the world's biggest ever banking bailout.
Hester, who was effectively hired by the government, has earned the respect of the business community by axing 41,000 jobs, selling non-core assets and transforming the lender's balance sheet.
At the same time, unions have been scathing of his management, especially as the massive jobs cull occurred alongside Hester earning millions of pounds in salary during his time in charge. However, he only took an annual bonus for 2010.
Osborne on Wednesday added that the government is "actively considering options for share sales in Lloyds".
He added in his speech: "Of course, we will only proceed if we get value for the taxpayer. And we have no pre-fixed timescale or method of disposal."
LBG, 39-percent owned by the British government, announced recently that it had rebounded into net profit during the first quarter of 2013 on the back of rising income, deep cost-cutting and falling impairment charges.
But it has failed in a bid to sell 632 branches at a loss to The Co-operative Bank -- which this week announced emergency plans to fill its own financial black hole, but without state help.