LONDON (Reuters) - A government-commissioned review into Britain's largely state-owned Royal Bank of Scotland (RBS.L) will call for the creation of an internal "bad bank" to house its problem loans, stopping short of breaking up the bank, Sky News reported on Saturday.
Britain's finance minister, George Osborne, will not pursue the dismantling of the 81 percent taxpayer-owned bank, according to Sky, with the findings of the review due as early as next Friday.
Osborne asked investment bank Rothschild (ROT.UL) in June to examine if RBS should be made to hive off its soured assets into a separate legal entity.
Earlier this month he said sorting out the bank was his main priority in the next few weeks, but said there was no prospect of selling the government's stake before the next election due in 2015.
Further recommendations from the study will include a reduction in the bank's investment banking operations and the sale of some assets, according to Sky.
The focus of the review's conclusions will be on repairing the bank, bailed out in 2008 at a cost of 45.5 billion pounds ($73.7 billion), rather than breaking it up.
An unnamed source familiar with the situation told Sky Osborne would step back from the most sweeping reforms.
"He will want to present it as a break-up, but it won't quite be at the most radical end of the spectrum of options."
The final decisions have not yet been taken, according to government and RBS officials quoted in the story, with significant change in the proposals a possibility.
According to plans as they stand, around 40 billion pounds of RBS's bad assets would be rebranded within a non-core asset division or "bad bank".
Both the Treasury and RBS declined to comment when contacted by Reuters.
(Reporting by Costas Pitas; Editing by Robin Pomeroy)