Having forced Royal Bank of Scotland to adopt what it deems a less risky business model, the UK government can say goodbye to its chances of breaking even when it sells the bank.

It is difficult to see how UK taxpayers can recover the costs of bailing out Royal Bank of Scotland (RBS) with the bank now set to become even further shrunken in stature. In its glory days, RBS was the world’s third largest bank by Tier 1 capital, according to The Banker’s Top 1000 ranking of July 2008. In last year’s ranking it had already fallen to 12th place and with another downsizing on the way it will be heading much lower.

Of course, noone wants to own a huge bank that is failing and RBS, which needed a £45.5bn ($75bn) bail-out and is 81% owned by the UK taxpayer, made dreadful mistakes. More than five years later it is still losing money, and a loss of £7bn is forecast by analysts such as CreditSights for 2013.

But, with RBS now set to shrink its investment banking and international operations still further, it is hard to understand how it can ever become valuable enough for investors to buy the shares at even a break-even price. The shares currently trade about £3.60 and need to hit £5 for taxpayers to recover their funds.

What seems to have happened is that politicians have insisted on having a bank that serves the UK and doesn’t get involved in risky investment banking and in paying out large bonuses. This is an easier proposition to sell to the electorate than a bank with markets operations in the US and Asia. The problem is that the UK is a highly competitive retail and corporate market with very thin margins. Given the unsustainable property boom in London and the south-east it is also questionable as to how safe the UK domestic market really is.

The historical evidence is that the least diversified banks – focused on a few sectors and a single geography – are more prone to crises that banks with a larger spread of assets. The demise of Northern Rock with its concentration on UK retail mortgages provides a good example. The other reality is that for all its faults, RBS had wholesale franchises that were leaders and attracted global custom.

Finance is the only sector of the UK economy that produces a trade surplus. By making RBS play the domestic game, the prospects for reaching a more even trading relationship with countries such as China are even more remote.

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