The UK government is understood to have appointed the Rothschild investment bank to advise it on splitting Royal Bank of Scotland (RBS) into a good bank and bad bank, writes Stephen Oryszczuk.

Rothschild beat off competition from Deutsche Bank and Bank of America Merrill Lynch to land the lucrative work which, according to reports, will begin immediately and will lead to options being presented in the next two months.

The government was forced to bail out RBS at the height of the financial crisis, after the bank struggled to cope with economic conditions following its disastrous takeover of ABM Amro. The government still owns 82% of the shares, which have fallen to less than half their value since the purchase.

Last month, Chancellor George Osborne said that he would look at “whether it is right for Britain to, in effect, see RBS broken up” after admitting that, with hindsight, the Edinburgh-based behemoth should have been split up at the height of the economic crisis in 2008.

Osborne’s personal ties to the Rothschild family are well-documented. At school and university he was friends with financier Nat Rothschild. But the pair fell out spectacularly in 2008 after Osborne joined former Labour spin doctor Peter Mandelson and controversial Russian oligarch Oleg Deripaska in a stay at the Rothschild villa in Corfu.

During the summer break, conversations supposedly conducted in private were leaked to the press, including claims by Rothschild that the chancellor sought to solicit a £50,000 donation from aluminium magnate Deripaska.