Bank of England governor Sir Mervyn King says Royal Bank of Scotland should be split into "good" and "bad" bank divisions to return it more quickly to the private sector.
Sir Mervyn told a Parliamentary Commission on Banking Standards on Wednesday that RBS was holding the wider economy back, and a split would aid recovery and boost lending.
"The lessons of history is that we should face up to it - it's worth less than we thought and we should accept that and get back to finding a way to create a new RBS that could be a major lender to the UK economy," Sir Mervyn said.
Royal Bank of Scotland last week it posted a net loss of £5.17 billion for 2012. It is is 81% owned by the state after it was rescued by the government at the height of the global financial crisis in 2008 at a cost of £45.5 billion, AAP reports.
RBS chief executive Stephen Hester insisted last Thursday that the bank's return to the private sector was on track and could be completed within two years.
However, Sir Mervyn said on Wednesday it was "nonsense" to think the government could run the bank at arm's length, adding he had discussed the matter with Chancellor George Osborne.
"Time has passed and aside from reducing the balance sheet, nothing has been achieved - we haven't managed to get it into the private sector," he noted.
"It would be much better to accept that it should have been a temporary period only and the longer this goes on, the more difficult it becomes."
