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LONDON (Reuters) - The finance ministry should examine the advantages and disadvantages of breaking up state-backed lenders RBS and Lloyds and hiving off their toxic assets into a 'bad bank', senior MPs have demanded.
The cross-party Treasury Select Committee, responsible for examining the finance ministry's policies, recommended it deliver a cost-benefit analysis in time for the government's spending review in June.
The report should also look at the impact on competition, it said.
Britain pumped 66 billion pounds into the banks to keep them afloat during the 2008 financial crisis, taking an 81 percent stake in RBS and a 39 percent shareholding in Lloyds.
The government does not have to adopt recommendations made by the committee but it would be considered unusual for it not to do so.
Officials at Britain's finance ministry could not be reached for comment. RBS and Lloyds declined to comment.
The committee has considered evidence from the outgoing head of Britain's central bank, Mervyn King, who called on the government to break up RBS so the state-backed lender could return to health and be sold to the private sector.
King said RBS needed to split off the bad assets on its books and build up capital at the remaining "good bank" so it can lend more.
However, Chancellor George Osborne appeared sceptical about the move, expressing concerns over the time it would take and the disruption it would cause when appearing before the committee.
RBS and Lloyds have already undertaken restructuring programmes shedding hundreds of billions of pounds worth of assets including the majority of their toxic assets.
RBS has said it hopes to be in a position to allow the government to start selling its shares before the next general election in 2015.
Industry and political sources have said a sale of the government's shares in Lloyds is possible before the election if they hit the 61 pence level which the government regards as its break-even price. They closed at 47.5 pence on Friday.
Reporting by Matt Scuffham; editing by Jason Neely