In what will be seen in some quarters as a volte face, the Treasury has announced that the ‘toxic’ assets of Royal Bank of Scotland (RBS) will not in fact be hived off into a so-called ‘bad bank’.

Following a review by the Treasury, a bad bank will be created – but instead of an ‘external’ bad bank that would require taxpayers’ money, an ‘internal’ bad bank funded by RBS will enable management to focus on new lending, the government said.

Ross McEwan, who took over as chief executive of RBS a month ago, explained: “One of the first steps we are taking is to create an internal ‘bad bank’ to manage these assets down so as to release capital. Our goal is to remove between 55% and 70% of these assets over the next two years.

“While there is inevitable uncertainty associated with running down such assets, we have a clear aspiration to remove all these assets from the balance sheet in three years. Our track record in delivering the Non-Core run-down to date should give everyone confidence that we can deliver on this plan.

“It will be called RBS Capital Resolution Group and will have strong and transparent governance and disclosure via an oversight committee which reports regularly to the main Board.”

RBS has also announced it will be accelerating exit from Citizens in the US, as part of a plan to raise capital equivalent to adding two percentage points to its capital ratio by 2015, in order to strengthen its balance sheet and focus on lending in the UK.

It has also pledged to become the leading small business bank as judged by customers, and measured by a newly-created survey to be run by the Federation of Small Businesses (FSB) and British Chambers of Commerce (BCC).

RBS will continue to shrink its investment banking arm with the results of a review of the Markets division to be published in February 2014, as well as “aggressively tackling” its cost base to improve the performance of its core businesses.

McEwan added: “RBS has made a lot of progress since 2009. As ever with any long and difficult job, a degree of weariness and even defensiveness has crept in. We have got to move on as a company. The bar has been set at a higher level for RBS than for other UK banks because we were rescued at the public’s expense.

“I have asked all our people to embrace the higher expectations that people have placed on our bank. That’s the only way we will build a really great business for our customers, our people and our shareholders. That’s my aim.”