ROYAL BANK OF SCOTLAND is poised to spark a diplomatic row with Ireland by attempting to dump £7 billion of toxic loans into the Irish “bad bank”.

Stephen Hester, the RBS chief executive, is expected to lodge an application to join Ireland’s National Asset Management Agency (Nama) within the next few weeks through its Ulster Bank subsidiary.

Irish officials are said to be furious about the plan, however. The Treasury had previously reached a “gentleman’s agreement” with its Dublin counterpart over their bailout plans.

The Treasury had agreed that no British banks would apply to use the Nama as long as no Irish banks tried to join the parallel UK programme, the Government Asset Protection Scheme (Gaps).

This was agreed to make it easier for taxpayers in both countries to stomach the deal. Under EU rules, Ireland is legally obliged to consider RBS’s application to join the scheme.

The Irish officials had no idea RBS was considering using the Nama scheme until Hester alluded to the possibility in a conference call with analysts two weeks ago. His comments came after the bank confirmed plans to place £282 billion of assets into Gaps — some £40 billion less than originally planned.

Hester told analysts that part of the reason the figure had come down was that RBS might use similar schemes in other countries — specifically Nama. Over the summer, Ulster Bank identified £15 billion of bad loans, mostly linked to property deals, in its £54 billion loan book. Although some of those loans are believed to be covered by Gaps, the bank has identified £7 billion of loans it could place in the Irish scheme.

A final decision has yet to be taken on whether to proceed, although it is understood that the documentation has already been drafted.

Sources close to the Treasury said that issues related to British banks participating in Nama had been resolved some time ago and that they were not aware of any current issues.

However, it is understood that Irish officials will not raise a complaint until the formal application from RBS has been received.

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