London: Royal Bank of Scotland Group Plc (RBS) will set up an internal bad bank to include £38 billion in toxic assets after UK Chancellor of the Exchequer George Osborne opted against a full breakup.

The bad bank’s assets will include £14.8 billion of assets from the core unit and £23.5 billion of non-core assets, the Edinburgh-based lender said in a statement on Friday. RBS may recognize as much as £4.5 billion of impairments by the year-end as it reduces those assets, the lender said. The net loss in the third-quarter narrowed to £828 million from £1.4 billion in the year-earlier period.

In light of the new strategy to deal with our high risk assets we expect a significant increase in impairments in the fourth quarter of 2013, which is likely to result in the group reporting a substantial loss for the full year, chief executive officer Ross McEwan said in the statement.

With 18 months to go before the next election, the Chancellor needs to convince voters he is seeking to recoup the £45.5 billion cost of RBS’s bailout in 2008 and 2009 while giving the bank room to clean up its balance sheet. Prime Minister David Cameron told Bloomberg News in June that Britons were more interested in getting their money back from RBS than a quick return to the private sector.

The shares have gained 13% this year to 367.6 pence on Thursday. That’s below the 407-pence price at which the government says it would break even on its investment. By contrast, Lloyds Banking Group Plc, which received a £20 billion rescue during the crisis, has increased 62%. Bloomberg