ROYAL Bank of Scotland is considering a share issue of £3bn-£4bn to reduce the government’s stake in the bank.<br /><br />The move would be a last-ditch bid to avoid seeing the government’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 “bad bank” 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 £19.5bn in ‘B’ shares it will currently use to pay for the APS, an arrangement that would take the taxpayer’s holding to more than 84 per cent.<br /><br />A share sale, likely to be in the region of £4bn, could see the bank raise sufficient capital to reduce its APS participation, potentially maintaining the state’s ownership of the bank at 70 per cent. RBS is also selling or preparing to close £230bn of non-core assets. Yesterday RBS declined to comment.<br /><br />RBS made a record loss of £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 £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 £15.6bn in ‘B’ shares to insure £260bn worth of assets. It is also focusing on a share placing to keep the government’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 £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 £1.9bn on the stake it took last October. <br /><br />Hester stands to collect £9.6m from a shares-based incentive scheme if he can get the bank’s share price to 70p by June 2012.