Officials close to the negotiations say the plan – mediated by the Treasury – is well advanced and is the favoured proposal being considered by Neelie Kroes, EU competition commissioner, though she is thought to want to force RBS to go further.
In particular, Brussels is keen to see a 10 per cent reduction in RBS’s small business banking operations.
This could be achieved via a disposal of the Scottish group’s RBS branch network south of the border, which mostly serves 1m small corporate customers.
A divestment of the business would be likely to be achieved via a sale to a rival, or to private equity, though a stock market listing is seen as an option, if the recent return of confidence in the banking sector endures.
In preparation for the option of a float, the bank has drawn up plans to hive off the English and Welsh RBS branch network and rebrand it under the defunct Williams and Glyn’s name. NatWest branches, the group’s main brand in England and Wales, would be unaffected.
Alistair Darling, the chancellor, has been discussing the proposal with Ms Kroes and hopes to get state aid clearance from Brussels within weeks.
RBS said last night that it was “co-operating with the Treasury and working towards a solution with the European Commission”. The bank has long argued that it is already proceeding with a strategic plan to shrink its balance sheet by 20 per cent.
Ms Kroes’s term of office expires on October 31, but Brussels lawyers have confirmed that the European Commission can continue to take state aid decisions after that date.
Any deal before the end of the month looks unlikely, although the bank could well be in a position to present the conclusion of negotiations in the second week of November. This could accompany an update on third-quarter performance and details of its participation in the government’s insurance scheme, into which it plans to inject up to £325bn of toxic assets.
Mr Darling is conscious that the sale of the RBS branch network could diminish investor value in the bank, in which taxpayers hold a 70 per cent stake. But an ally of the chancellor said: “We are also very keen to bolster competition.”