"Whilst good progress has been made on the programme to create a cloned banking platform, the Board concluded that the risks and costs inherent in the programme are such that it would not be prudent to continue"
The loss was largely due to a £1,193 billion special dividend payment to the government, and £1,315 million of conduct costs, including PPI provisions.
The bank set aside a further £450 million provision for PPI in the first half of 2016, taking the total cost to the bank up to £4.7 billion.
RBS had hoped to separate Williams & Glyn as a standalone challenger bank by 2017, but admitted in its full year results earlier this year that it continues to face "significant challenges and risks in separating the Williams & Glyn business".
Earlier this week, Santander made a formal bid to acquire the Williams & Glyn branches.
Restructuring costs were £392 million in Q2, an increase of £154 million compared with Q1 2016, and included £187 million in respect of Williams & Glyn.
In its interim results, RBS said: "On 28 April 2016 we announced that there was a significant risk that the separation and divestment of Williams & Glyn will not be achieved by 31 December 2017. RBS remains committed to meeting its State Aid obligations. Work has continued to explore alternative means to achieve separation and divestment and RBS has had positive discussions with a number of interested parties concerning an alternative transaction related to substantially all of the business previously described as Williams & Glyn. These discussions are at a preliminary stage and may or may not lead to a viable transaction.
"Due to the complexities of Williams & Glyn's separation, whilst good progress has been made on the programme to create a cloned banking platform, the Board concluded that the risks and costs inherent in the programme are such that it would not be prudent to continue with this programme. RBS will instead prioritise exploring alternative means to achieve divestment."