LONDON Breaking up Royal Bank of Scotland (RBS.L) could make it easier to sell the part state-owned British lender, a former Bank of England monetary policy committee member said on Monday.
Adam Posen told lawmakers such a step would also boost competition in a market dominated by RBS and three other big lenders - Barclays (BARC.L), HSBC (HSBA.L) and Lloyds (LLOY.L).
Britain owns 82 percent of RBS and has a 40 percent stake in Lloyds. The government wants to return both to full private ownership and make a profit for taxpayers.
"A clean investment bank or clean commercial bank may be an easier thing to sell," Posen told a panel of lawmakers.
Posen said the authorities were assessing if the two banks needed more capital, and whether there was a backlog of loans to be hived off, perhaps into a "bad bank", as Ireland has done.
The lawmakers form a commission that will recommend legislative changes around March to improve banking standards.
Andrew Haldane, the Bank of England's director of financial stability, told the commission the central bank's Financial Policy Committee saw a "need for action" at Lloyds and RBS.
"The two banks are both in a position that it would be difficult for them to attract private capital without some restructuring of their balance sheet," Haldane said.
What might emerge is a simpler, "somewhat slimmer good bank purged of its bad assets or suspect assets" and perhaps ringfenced with extra capital requirements, Haldane said.
He would not say whether a "bad bank" should be created to make a sale of the "good bank" easier.
The FPC is due to discuss in coming weeks an assessment of how much extra capital Lloyds, RBS and other banks may need.
Posen said regulators were still under pressure not to harm large financial centers such as London. "There is some room for big dumb rules, to limit the right of discretion on the part of regulators."
(Reporting by Huw Jones; Editing by Dan Lalor)