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Rock to create bad bank

Northern Rock has revealed it will be taking its toxic assets and moving them to a separate ‘bad bank’.

Reports from this weekend suggest part-nationalised bank RBS is set to follow Northern Rock, but the fully nationalised lender has confirmed that it will be taking any of its bad assets and placing them in a separate legal entity, away from its balance sheet.

Chief executive Gary Hoffman says: “There is a lot of work to do in what this structure will look like, we have quickly agreed a high level model with the Treasury so far. It is clear to us that some of our so-called bad assets will be put into a separate legal entity in order to minimise and optimise the amount of capital we have.

“It is clear that some good assets will be placed in a different legal entity with deposits and I am sure that is the case. Precisely what assets will go where we don’t know yet, we have to agree that with the Government and the EU Commission.”

Hoffman admitted Northern Rock did not know whether the ‘good’ bank will be larger than the ‘bad’ bank or not, but said as yet it has no intent to use the Government asset Guarantee scheme as capital within the group was adequate to cover all capital requirements for both banks. “We do not need a separate capital arrangement,” says Hoffman.

RBS chief executive Stephen Hester said his bank is in the midst of a “comprehensive and radical restructuring” that may leave thousands of RBS employees out of work.

Reports suggest these changes will include ringfencing good and bad assets in an attempt to create enough ‘good’ equity to be able to afford the Government’s asset guarantee scheme, which could cost RBS as much as £4bn.

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