BREAKING up the Royal Bank of Scotland would result in the loss of thousands of jobs, Alex Salmond warned yesterday.

The First Minister was responding to a suggestion from Vince Cable, the Business Secretary, for the Edinburgh-based institution to be carved up to create a "British Business Bank" with the aim of increasing lending rapidly to small and medium-sized firms.

"We should be willing to use such an institution to support our other industrial objectives such as supporting exports and sectors identified as of strategic importance," the Secretary of State said in a leaked letter to Prime Minister David Cameron and his deputy, Nick Clegg.

However, Mr Cable later retracted his proposal, which had been widely criticised, admitting the scheme – “floated” in a private letter to David Cameron and Nick Clegg – would delay the return of the part-nationalised bank to the private sector and could fall foul of EU rules.

In his annual set-piece address to the City last night, Mr Cable launched a new onslaught on the banks, accusing them of “imperilling” Britain’s economic recovery and denouncing the support offered by the banks to enterprising small and medium businesses as “second division”.

But he did acknowledge that the solution was not his leaked proposal to carve a British business bank out of RBS.

“It would almost certainly be necessary to lengthen the period in public ownership,” he said. “It may well mean state-controlled banks being able to lend at cheaper rates than new commercial banks, thereby affecting the development of more diverse finance.
“And even if they did these things, we would run into problems with EU state aid clearance.”

Responding to Mr Cable's initial plans for breaking up the bank, Mr Salmond had earlier said: "RBS is already selling its investment bank for example, but if you had a forced disposal of assets, it would cost thousands of jobs at RBS headquarters in Edinburgh.

"So, here we have the Secretary of State for Business saying he wants to break up a bank and cost thousands of jobs in Scotland's capital without so much as a by-your-leave."

No 10 yesterday attempted to play down Mr Cable's comments, insisting the plan for RBS was to lend more to British businesses.

Asked if breaking up the Scottish bank was a good idea, a spokesman replied: "The current plan envisages significant restructuring of RBS and quite a lot has already happened. So in future RBS will continue to be a major UK bank but the majority of its business will be in the UK and it will be in personal and business banking."

Sir George Mathewson, the former RBS chief executive, had also made clear he believed Mr Cable's idea was "totally un-acceptable" and insisted it was "not going to happen". He said: "It's a strange way to go about solving a problem – to break up the major provider of finance to small and medium-sized business in the United Kingdom."

Sir George admitted that while there were "issues" with business lending, he argued "there would certainly be more issues with the sort of approach Vince Cable is advocating".

He added: "Any time government has got involved in financing schemes for business they have not worked, they have become bureaucratic, the decision-making process is just not fitted for business, and I have a lot of cynicism about the way that would work."

RBS was raised at Prime Minister's Questions by Labour's Lindsay Roy, who said because the bank was 82%-owned by the taxpayer, it could intervene to stop the relocation of 300 jobs from Scotland to India.

The MP for Glenrothes asked Mr Cameron: "The Prime Minister and the Government are the biggest shareholders; when will you stand up to RBS and prevent these needless job losses in the UK?"

The PM told MPs it was important to recognise the last Government put, on behalf of the country, £45 billion into RBS – £2500 for every working family in the country. He added: "The most important thing is we get that money back. We need RBS to return to health - to deal with the trouble it's got into; it's got to grow the rest of its business.

"Then we will be in a position where we can return people the money they put into that bank. That's what matters most of all."