LONDON — The Bank of England's governor warned Wednesday that Britain's government should take decisive action over losses at the Royal Bank of Scotland sooner rather than later to prevent it from being a drag on the economy.
Mervyn King told a parliamentary committee on banking that the government needed to finish within a year a radical restructure of RBS, which is more than 80 percent owned by the British taxpayer after getting a 45 billion-pound ($71 billion) bailout in 2008.
He said it was "not beyond the wit of man" to split RBS into "good" and "bad" banks. That would allow the government to sell off the healthy part, which would also be free to lend more to customers, helping the economy.
But to do that, the government will have to accept it will likely not recover all the money it spent on rescuing RBS.
"We should face up to it – it's worth less than we thought and we should accept that and get back to finding a way to create a new RBS that could be a major lender to the U.K. economy," King said.
Treasury chief George Osborne recently told the committee he believes there are "very considerable obstacles" to splitting RBS, and that he favored shrinking the bank's balance sheet while it focuses on Britain's economy.
"Time has passed and aside from reducing the balance sheet, nothing has been achieved – we haven't managed to get it into the private sector," King said. "It would be much better to accept that it should have been a temporary period only, and the longer this goes on, the more difficult it becomes."
King's comments come only a week after RBS' chief executive, Stephen Hester, stressed the bank has made progress in the restructuring process – even as he acknowledged it would take time to rebuild public trust dented by what he described as a "chastening year."
The bank reported a full-year loss of 5.97 billion pounds ($9 billion), worse than the shortfall of 2 billion pounds in 2011.
Hester stressed that the restructuring was entering the final phase, and that RBS would return to private ownership in the next few years. RBS has said it is making progress in repaying emergency liquidity loans from the government and central banks.
The bank declined to respond Wednesday to the sharp criticism by King, who is entering the final six months of his tenure.