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Talks between the two banks fell through after they failed to agree on a price for the sale of the Williams & Glyn network, the Financial Times reported on Tuesday evening citing "people briefed on the process."
The business includes around 1.8 million personal banking customers and 250,000 small business accounts.
Williams & Glyn was originally valued at around £1.9 billion, but it seems as though Santander is unwilling to pay that much. There is small hope for RBS that Santander could come back with another offer. "At the right price, we'll do the transaction," a person close to Santander told the FT.
This is not the first time that Santander has attempted to buy Williams & Glyn without any success. In 2012, the bank pulled out of a deal at the last minute because of fears about losing customers and a breakdown in IT. That deal was rumoured to be worth around £1.65 billion.
RBS must find a buyer for Williams & Glyn and complete the sale before the end of 2017, or could face a substantial fine, or a forced sale of the business by the European Commission.
The Commission mandated that Williams & Glyn must be divested from RBS' core business as a condition of the bailout it received during the financial crisis, when the British government stepped in to prevent the lender - which at one point was the biggest bank in the world in terms of total assets - from collapsing.
RBS' chief executive Ross McEwan has said in the past that it must sell W&G as a condition of returning excess capital and dividends to investors.
RBS is still almost three-quarters owned by the British government, despite the government gradually selling off small portions of the bank in the past two years.
Shares in RBS and Santander both seem largely unaffected by the news, and around 8:25 a.m. BST (3:25 a.m. ET) RBS has gained almost 1%, while Santander has picked up by more than 2.2%. Here's how RBS looks:
Investing.com