Chancellor George Osborne has suggested the possibility of splitting the Ulster Bank into both 'good' and 'bad' banks.
In his annual Mansion House speech in the City of London, Mr Osborne said he has ordered an urgent review, to report in the autumn, into the possibility of breaking up the Ulster's parent company RBS into a "good bank" and a "bad bank", to separate out toxic assets and risky loans from parts of the business which support the economy.
The review will particularly focus on assets in Ulster Bank and commercial real estate, and will not involve any further injection of taxpayer money into RBS.
The Ulster Bank posted losses of more than £1bn for 2012.
Mr Osborne said that the sale of the Government's stake in RBS remains "some way off".
"We will urgently investigate the case for taking the bad assets – those mistakes of the past – out of RBS," he said.
"We'll look at a broad range of RBS's assets, but particularly assets in Ulster Bank and UK commercial real estate.
"We're not prepared to put more taxpayer capital into RBS as part of this process. We will establish a bad bank if it meets our three objectives: if it supports the British economy, if it's in the interests of taxpayers – and if it accelerates the return to private ownership.
"But if the review reveals that it would not achieve these things, then we won't do it."
He did reveal the Treasury is "actively considering" steps to return partially state-owned Lloyds bank to the private sector and may offer shares to the public.
The first sale of Lloyds shares is likely to go to institutional investors, said the Chancellor. But he said he was considering a retail offering to the general public for later tranches, raising the possibility of a 'Tell Sid'-style privatisation of the kind seen in the 1980s.
In some of his most upbeat comments about the state of the UK economy since the start of the downturn, Mr Osborne said Britain had "left intensive care" and was now "moving from rescue to recovery".
He told his audience of City figures: "Nothing better signals Britain's move from rescue to recovery than the fact that we can start to plan for our exit from Government share ownership of our biggest banks."
He set out three objectives that will guide the Government's approach on the banks, saying it must maximise their ability to support the UK economy, get the best value for money for the taxpayer and do whatever can be done to return them to private ownership.
The Government bought 39% of Lloyds shares and 81% of RBS in a multi-million bailout at the height of the 2008 financial crisis and speculation has been mounting the Treasury wants to begin the process of selling its stake before the 2015 general election.
Prime Minister David Cameron recently raised the prospect of selling RBS shares at a loss.
Mr Osborne said last night that Lloyds was now in a "good position" with growing investor interest and shares trading at "around the price where selling would reduce the national debt".
The Government believes a sale price of 61.2p would allow it to recoup the £20bn it ploughed into the bank.
By contrast, Mr Osborne said there was "no doubt" that RBS remains "weighed down by too many poor assets", including loans issued in the pre-2008 boom which have since gone bad.