Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) has trimmed its list of bidders for the 316 branches it has been forced to sell by European regulators.

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The part-nationalized bank has reportedly informed J.C. Flowers and its partner, Apollo Global that their joint proposal had not been successful. The buy-out group Apollo and J.C. Flowers has been headed by former Goldman Sachs banker Chris Flowers.

In March, Bank of England’s Financial Policy Committee indicated that the U.K. banking sector had a £25 billion capital shortfall. It was widely believed that some £9 billion would be attributable to Royal Bank of Scotland Group plc and Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY).

With the exit of the buy-out group from the race, the shortlist of bidders is pruned to three, comprising a consortium led by former Tesco PLC (LON:TSCO) finance director Andrew Higginson, another from Standard Life-backed Corsair Capitaland the third bidder is the London-based Anacap Financial Partners, which has partnered with the US buyout firm Blackstone.

The Andrew Higginson consortium is comprised of over 20 asset management companies, including Schroders, Threadneedle, Aviva and Invesco Perpetual. The consortium’s proposal involves creating a listed shell company into which the Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS)’s assets would be reversed and their bid is estimated to be at the upper end of an £800 million to £1 billion range.

RBS To Sell Assets As A result Of Its £45 Billion Bailout:

The sale of the 315 branches of Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS), dubbed “Project Rainbow”, has been on the cards since the European Commission forced RBS to sell assets as a result of its £45 billion bailout during the banking crisis.  The 2008 bailout left Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) 82-percent owned by the government. A planned sale to Spain’s Santander, initially valued at £1.65 billion, fell apart last October.

Yesterday, Spain’s biggest bank Santander, has announced its decision to sell a 50 percent stake in its asset management arm to U.S. private equity firms Warburg Pincus and General Atlantic LLC.

The Rainbow transaction is similar to Verde portfolio of 630 branches that Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY) is also under orders from European Commission to sell.

Banks in the U.K. have to confront several challenges such as a decline in economic climate, non-commensurate income growth from investment banking and meeting profit target through reduction in staff count. The reduction in staff strength is accentuated by the banks decision to sell off some of their assets. Lloyds Bank indicated that it plans to conform to capital adequacy requirement by disposing divesting non-core assets. Royal Bank of Scotland Group plc slashed 78,000 jobs since 2008, with an aim to prop up its earnings. This would facilitate the government to reduce its 81 percent stake held with RBS.

Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) is expected to finalize a short list sometime next week, but the time table for an eventual sale remains uncertain, according to Reuters.