ROYAL Bank of Scotland is considering a share issue of &pound;3bn-&pound;4bn to reduce the government&rsquo;s stake in the bank.<br /><br />The move would be a last-ditch bid to avoid seeing the government&rsquo;s stake rise above 70 per cent following participation in the Asset Protection Scheme (APS).<br /><br />It would also see RBS joining Lloyds in the scramble to limit the use of the&nbsp; &ldquo;bad bank&rdquo; scheme, which is seen as a costly way of dealing with toxic assets.<br /><br />RBS chief executive Stephen Hester has embarked on a charm offensive with institutional investors ahead of a potential fundraising initiative that could take place within weeks.<br /><br />A capital-raising effort would give the bank an alternative to the &pound;19.5bn in &lsquo;B&rsquo; shares it will currently use to pay for the APS, an arrangement that would take the taxpayer&rsquo;s holding to more than 84 per cent.<br /><br />A share sale, likely to be in the region of &pound;4bn, could see the bank raise sufficient capital to reduce its APS participation, potentially maintaining the state&rsquo;s ownership of the bank at 70 per cent. RBS is also selling or preparing to close &pound;230bn of non-core assets. Yesterday RBS declined to comment.<br /><br />RBS made a record loss of &pound;24.1bn last year after acquiring ABN Amro just before the financial crisis.<br /><br />It currently has an agreement with the government to insure around &pound;325bn of its riskiest assets, but fears that excessive use of state aid will damage its negotiations with European Commission competition commissioner Neelie Kroes.<br /><br />Lloyds has a similar agreement, under which it pays &pound;15.6bn in &lsquo;B&rsquo; shares to insure &pound;260bn worth of assets. It is also focusing on a share placing to keep the government&rsquo;s stake below 50 per cent.<br /><br />Kroes is likely to force both Lloyds and RBS to dispose of assets in return for approval of the state aid they are receiving. <br /><br />Last year shareholders paid 200p per share in a &pound;12bn rights issue.<br /><br />After the credit crunch hit and the government was forced to step in for support, shares slumped to as low as 10p in January.<br /><br />However shares have rallied as investors have grown more confident that the worst of the recession is over. <br /><br />RBS shares closed at 56.3p last week, giving the government a paper profit of &pound;1.9bn on the stake it took last October. <br /><br />Hester stands to collect &pound;9.6m from a shares-based incentive scheme if he can get the bank&rsquo;s share price to 70p by June 2012.