6 March 2013 Last updated at 10:13 ET

Article written by Robert Peston Business editor

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Will RBS sell Coutts?

 

Sir Mervyn King has suggested splitting RBS in two.

Mervyn King's remarks that he wants to see RBS's poisonous and low quality assets hived off into a new so-called bad bank matter - but probably not in the way that seems most obvious.

Because that's not going to happen. My sources at the Treasury tell me that they are happy with RBS's current proposals to mend itself, which involve shrinking its investment bank and floating a share of its US retail bank, Citizens, on the stock market.

However within a matter of days, Sir Mervyn and his colleagues on the Bank of England's Financial Policy Committee, or FPC, will determine how much additional capital all Britain's banks have to find, to protect themselves against future losses on loans to business and to personal customers who are only just keeping their heads above water (and see one I prepared earlier).

What the governor signalled is his concern that RBS remains too weak to provide the credit needed for economic recovery. So it seems highly plausible that he will instruct RBS to raise more capital than it is currently planning to do.

Since George Osborne has set up the FPC with independent authority to minimise the risks in the financial system, he would not find it easy to over-rule or ignore it on the first occasion it makes a big decision.

The words "back" and "rod" are probably on Mr Osborne's mind a good deal, in these Sir Mervyn's last weeks in the job.

That said, the idea that taxpayers will end up putting more money into RBS is for the birds. Such would be a short cut to political ruin for Mr Osborne, since Tory MPs would not tolerate even an extra penny of our money going into RBS.

The far more plausible alternative is that RBS will end up having to sell even more assets than it currently plans, including - perhaps - the Queen's bank, Coutts.