SACRIFICIAL LAMB
Stricter banking regulations and low profitability across the industry had already prompted Hester to take a knife to the investment bank, which now accounts for only about 20 percent of operating profit, compared with around half in 2007.
A strong proponent of universal banking, Hestor is reluctant to make any more cuts, having argued that RBS needs investment banking activities to serve its corporate clients properly, but he could find his hand forced.
Britain's financial regulator is keen for RBS to bolster its capital position, either through selling its U.S. business, Citizens, or further shrinking its investment bank.
There is growing political support within Britain for banks to separate their retail operations from riskier investment banking activities.
Another political source told Reuters that lawmakers would seize on any sign that the culture within the investment bank was still rotten and look for severe remedies.
RBS's private investors, however, will resist further cuts.
They fear making the investment bank a sort of sacrificial lamb could make the state's stakes in RBS far tougher to sell."We are extremely sensitive to political interference in the sector, and it's getting worse. Shrinking the investment bank further at RBS is pointless - it's been de-risked - and may hurt the corporate bank," one of RBS's biggest 10 investors said.
RBS's Chairman Philip Hampton said last year that the bank was preparing for the British government to start selling its shares in the bank in the next two years, but some investors believe that could be scuppered by regulatory interference."There is a big political drive to get these stakes sold at some point soon but, set against this, there is a faction on the FPC (Bank of England's Financial Policy Committee) which wants the UK banking sector to be as domestic as possible and to run with more capital, which could be painful for share prices," the top 10 investor said.
The big bonuses paid out at the investment bank also sit badly with taxpayers. Hourican received a pay package worth almost 7.5 million pounds in 2011, far ahead of Hester, who waved his bonus and took home a salary of 1.2 million pounds.
At its peak, RBS's global banking and markets business (GBM) had a balance sheet exceeding 1 trillion pounds.
The division has since been chopped down to less than half that and renamed markets and international. RBS has sold off or shut down much of its equities operations but retains significant fixed income and foreign exchange businesses.
However, it has still produced more than 10 billion pounds of profits since the financial crisis. In the first half of last year, it made an operating profit of 1.1 billion pounds and produced a return on equity of 14 percent.
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