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RBS Puts £38bn In 'Bad Bank' Amid Big Loss

Royal Bank of Scotland (LSE: RBS.L - news) has confirmed it is placing £38bn of toxic loans in an internal 'bad bank' and a quarterly loss of £634m as it continues to pay the price for the mistakes of its past.

As previously reported by Sky News , RBS said the high risk assets would be split off to avoid a full break up of the bank - a move the Chancellor had been considering since the summer as part of efforts to aid its recovery following the taxpayer bailout of 2008.

It is understood £9bn of those assets relate to its troubled Ulster Bank arm, which was damaged by the fallout when Ireland (Other OTC: IRLD - news) 's property boom subsequently collapsed.

The bank also confirmed its £634m pre-tax loss in the third quarter included a further provision of £250m related to the Payment Protection Insurance (PPI) scandal.

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But it was the results of the Treasury's four-month review which dominated Friday's wealth of announcements on RBS - meaning it avoided a threatened carve-up and nationalisation of its problem loans.

New chief executive Ross McEwan said the bank had now started a full review of the lender, which will report back in February, to "create a bank that can reward the faith of UK taxpayers and all our investors."

As part of renewed efforts to concentrate on retail banking - serving UK consumers and businesses - the sale of its Citizens US banking subsidiary is to be speeded up with a partial flotation next year.

The bank has pledged to do more for small and medium-sized businesses after a separate review slammed its treatment of such customers, especially those in financial distress.

The report by Sir Andrew Large said RBS had not met its own lending targets or the expectations of its customers and some had made "serious" allegations about the bank's actions.

George Osborne said RBS's new focus will see it being a "boost to the British economy instead of a burden."

He tweeted: "RBS will deal with mistakes of past by separating out good loans from bad within the bank- so it can focus on lending to British businesses."

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