In a letter to prime minister David Cameron and deputy prime minister Nick Clegg that was leaked to the BBC, Cable says the government should recognise that RBS will not return to the market in its current form.
He wrote: “My suggestion is that we recognise that RBS will not return to the market in its current shape and use its time as ward of state to carve out of it a British business bank with a clean balance sheet and a mandate to expand lending rapidly to sound businesses.
“We should be willing to use such an institution to support our other industrial objectives, such as supporting exports and sectors identified as of strategic importance. But this will take time and in the meantime we have to get the state banks lending to businesses, especially SMEs.”
RBS is 82% owned by the government and last month reported a loss of £2bn for 2011.