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...AS RBS HIT BY TREASURY BONUS CAPS

ROYAL Bank of Scotland&rsquo;s board was on a collision course with the Treasury last night after the government threatened to veto the bank&rsquo;s plans to pay up to &pound;1.5bn in bonuses to its investment bankers. <br /><br />Stephen Hester, the bank&rsquo;s chief executive, and the rest of the RBS board are said to be prepared to resign en masse if they feel their ability to fulfil their fiduciary duties to shareholders is being hampered by an inability to pay competitive wages to key staff. The dramatic development is thought to follow legal advice.<br /><br />RBS yesterday formally warned that it risks an exodus of staff if the Treasury chooses to restrict bonuses. In a circular sent out to shareholders, RBS said: &ldquo;This requirement may adversely impact RBS&rsquo; ability to attract and retain senior managers and other key employees and thereby place RBS at a significant competitive disadvantage against its competitors, as well as increasing the risks facing RBS and weakening management&rsquo;s ability to deal with them.&rdquo;<br /><br />The Treasury has the authority to control the &ldquo;quantum and shape&rdquo; of the bonus pool under the terms of the bank&rsquo;s entry to the Asset Protection Scheme.<br /><br />One source said: &ldquo;The bonus capping rule was a condition of the government fund, but equally the government wouldn&rsquo;t use it because it would make the board&rsquo;s position untenable.&rdquo;<br /><br />Industry sources said the news was sure to increase the flow of RBS bankers&rsquo; resum&eacute;s to rival houses and recruitment consultants. Another added: &ldquo;Retention of staff is important, but let&rsquo;s not forget the importance of bringing people in. And who&rsquo;s going to want to go there if they think their bonus contract isn&rsquo;t worth the paper it&rsquo;s written on?&rdquo;<br /><br />Last year RBS paid &pound;900m in bonuses to its investment bankers. Profits have been significantly higher in 2009 and it is thought the overall bonus pot could be 50 per cent larger this year, although a spokesman said no figures had been decided.<br /><br />Sources close to RBS predicted the Treasury would back down. Others accused the government of populist posturing and of using UKFI, which is supposed to be independent, for political purposes.<br /><br />In a further blow to RBS and Lloyds Banking Group, it emerged the banks may fail to meet their promise to lend &pound;27bn net funds to British businesses this year, leading to sanctions. <br /><br />Lord Myners, the City minister, told Sky News: &ldquo;There&rsquo;s a possibility the targets won&rsquo;t be met.&rdquo; Sanctions could include slashing the bonuses awarded to chief executives Stephen Hester and Eric Daniels.