Royal Bank of Scotland has taken a fresh £750 million hit as it abandoned plans to create a standalone bank.

It is instead to seek permission from Brussels to set up a fund to meet the terms of a state-aid deal agreed at the time of its £46 billion bailout by the government.

RBS said last night that it was asking the European Commission to approve a plan whereby it will establish a fund to help smaller lenders provide services to small and medium-sized businesses as an alternative to selling a new bank that was to be known as Williams & Glyn.

The bank said that it would take a £750 million provision in its 2016 accounts to recognise the cost of its re-engineered plans and that the Treasury was supporting its application to the EC to amend the terms of its state aid.

“If agreed, it would deliver an outcome on our EC state aid divestment obligations more quickly and with more certainty than undertaking a difficult and complex sale and would provide much needed certainty for customers and staff,” Ross McEwan, chief executive of RBS, said.

The bank, which is 73 per cent owned by the state, said that were it to stick to its original plan, it would be impossible to meet the deadline of the end of this year to achieve the full separation and sale of Williams & Glyn, which has cost it more than £1 billion as it has struggled to spin off the 300-branch business.

Santander UK and CYBG, owner of the Clydesdale and Yorkshire banks, had been considering bids for Williams & Glyn but neither made a formal offer.

RBS’s said its new SME fund would be managed by an independent body and would provide financial support in the form of dowries to “eligible challenger banks” to give its customers an incentive to switch their accounts.

RBS also said that it would open its branch cash and cheque network to smaller banks that met its criteria.

Selling Williams & Glyn would have marked the fifth big divestment by RBS since its rescue nine years ago. The Treasury said it had had “constructive contact” with the EC over the renegotiation of the bank’s state aid deal.

A spokesman for the Treasury said: “RBS must deliver on its remaining state-aid commitments and this new plan represents the most effective way of delivering the pro-competition objectives behind them.”