* Commission likely to set out range of options for RBS
* Commission members including Lawson supportive of breakup
* Unlikely to make specific recommendations on RBS's future
* MPs reviewing final draft of report before talks next week
* Final recommendations expected week commencing June 17
By Matt Scuffham and Steve Slater
LONDON, June 4 (Reuters) - Splitting up part-nationalisedRoyal Bank of Scotland (RBS) will be put forward as anoption by lawmakers examining standards in British banking,political and industry sources said on Tuesday.
The bank's division would allow its toxic assets to begrouped into a "bad bank" separate from its profitable business,freeing it to make the increased lending that the economy needs,but has been rejected so far since it could be complicated andexpensive for the government to administer.
The sources said the Parliamentary Commission on BankingStandards is likely to lay out the pros and cons of such a move,but will stop short of making outright recommendations on thebank's future when it publishes its final report later in June.
Britain set up the cross-party commission last year to lookat ethics in banking, after Barclays Plc was fined overthe manipulation of global interest rate benchmarks.
Some members of the commission, notably former Britishfinance minister Nigel Lawson, are known to support hiving offRBS's toxic assets into a bad bank.
Yet the commission took little public evidence on the issue,making other members reluctant to make a firm recommendation onthe matter.
Outgoing Bank of England governor Mervyn King brought theissue to the fore when he recommended a breakup of RBS in thelast of the inquiry's 73 witness sessions.
RBS has already undergone a massive restructuring since thegovernment pumped in 45.8 billion pounds ($70 billion) in 2008to keep it afloat, leaving taxpayers with an 81 percent stake.
COST-BENEFIT
The separate cross-party Treasury Select Committee, on whichfive members of the Banking Standards Commission also sit, hasrecommended the finance ministry should examine a possiblebreakup and produce a cost-benefit analysis.
But the Treasury has yet to respond to that request.
Finance Minister George Osborne has said he would thinktwice about breaking up RBS because of the expense andcomplexity involved.
Britain is looking at options for re-privatising both RBSand Lloyds Banking Group Plc, in which it holds a 39percent stake. Offloading its shares in Lloyds would be morestraightforward, given they are trading above the price at whichthe government considers it would break even.
Shares in RBS are trading well below the government'sbreak-even price and Treasury officials are looking at otheroptions, such as a mass share giveaway to the British public.
Members of the Banking Standards Commission are reviewing afinal draft of their 600-page report and will meet next Mondayand Tuesday to debate final recommendations.
Sources said the draft report has been prepared by officialsworking for the commission's chairman, Conservative lawmakerAndrew Tyrie, and was handed down to the nine other lawmakers onthe commission late last week.
The draft incorporates proposals relating to all issues onwhich the commission has heard evidence and not all of them willmake it into the final report.
Sources have said Tyrie is aiming to publish the report inthe week starting June 17, but that is subject to delay if aconsensus cannot be agreed. Members of the commission have saidthey want unanimous agreement on the final recommendations.
Barclays (BARC)
Lloyds (LLOY)