The UK chancellor sought the European Union’s permission to split Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) without being forced to adhere to new EU banking rules.

RBS

The European Union’s earlier notification provided stricter new rules on executive pay and share ownership.

The UK chancellor reportedly sought clearance from the European Union in July, just before the stricter new rules came into force.

Smoothing the carve-out process

If the EU approves UK chancellor George Osborne’s request, it would free up the chancellor to order a break-up of Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) without being forced to wipe out private shareholders, impose losses on junior bondholders or slash executive pay.

The revised EU state aid rules mandate strict EU conditions on state support to banks, besides a £471,000 cap on executive pay.

New European legislation covering the way EU financial bailouts will be resolved came into effect recently, as an intermediary step to remove the legal framework for handling the ongoing crisis before the Single Resolution Mechanism is finalized next year.

Alex Barker and Patrick Jenkins of FT, citing officials familiar with the case, said the recent move from the UK’s chancellor did not prejudge a Treasury review into whether living off of toxic assets in a government-owned “bad bank” would accelerate Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS)’s recovery and increase business lending.

FT’s reporters also feel the recent move demonstrates that no options are being ruled out. Rothschild, who is advising the chancellor, is cautious about the benefits of dumping a large asset portfolio in an external bad bank.

RBS Split Into Good Bank And Bad Bank

The UK chancellor’s recent request to split Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) into a good bank and a bad bank may heighten expectations that George Osborne intends to divide the bank. Katherine Griffiths of The Times feels an announcement could be expected in the next couple of weeks.

During 2009, Brussels approved the £45 billion Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) bailout, subject to the UK promising to shrink the lender’s balance sheet. The European Union’s stricter bailout rules would have banned the UK Treasury from buying out RBS shareholders, or leaving junior bondholders untouched when breaking up the bank.