Leading article: The Government cannot have it both ways with the banks

It can't stop the bonuses and let them act commercially at the same time

What lies behind the latest rumpus over banking bonuses – this time in the virtually state-owned Royal Bank of Scotland? A stark decision. Do we want RBS to be run as a normal commercial bank, albeit one that happens to have the state as its dominant shareholder? Or do we want it to fulfil a quasi-social role instead, in which case the normal rules of profitability and remuneration for staff are suspended, if not abolished. It seems increasingly clear that we cannot have it both ways.

There is a case for both approaches. RBS could be run, as the Liberal Democrats' Treasury spokesman Vince Cable seems to want, as a sort of National Social Investment Bank, obliged to lend freely for the general good of the economy as a whole, boosting credit and spending and avoiding the dreaded double dip recession. RBS banks, including NatWest, could market themselves, to revive an old slogan from a rival, as "The Bank That Likes to Say Yes – Because the Treasury Tells Us To", a soft touch for hard-pressed first-time buyers and small businesses.

There is a case for that, though RBS's bad debts would probably rise, its profitability and capital may well remain inadequate and it might take even longer to return it to the private sector, where it belongs. It would all cost even more taxpayers' money, too. It would also be deeply anti-competitive for the private sector banks, which is wrong in principle and in breach of EU rules.

Given that, there seems little choice but for the Treasury to let the bank run itself as if it were still privately owned, sponsoring sports teams, treating lucrative clients to lavish hospitality, taking risks in its investment banking businesses and, indeed, paying big bonuses to successful traders, just as Barclays et al are allowed to. We may not like banks doing some or all of those things, especially the obscene bonuses, and that is why we need to regulate them all as a group. (And deal urgently with the "too big and too important to fail" conundrum raised so doggedly by the Governor of the Bank of England, Mervyn King).

It makes sense to impose tough rules on bonuses that apply to all the banks, linking them to performance, making them long term in nature and so on; it makes no sense to apply restraint only to some banks. Indeed, it would be best to do it internationally. And if the Government has suddenly ceased to be relaxed about people – bankers and others – getting filthy rich then they should just go ahead and tax them.

The RBS board have discovered, a little late in the day, that the rules of the game have changed for them. The most likely outcome in this case will be much the same as it ever was for all those other nationalised industries of the past – British Steel, British Leyland, the Coal Board, and the Post Office still – that tried to run themselves in a commercial fashion but found ministerial interference a fact of life: a muddle. You can tell as much from the conflicting noises coming from the Government. Treasury sources want to call the RBS board's bluff; Harriet Harman calls them irresponsible and reckless; Lord Mandelson grudgingly concedes the commercial realities.

So bonuses of some sort will almost certainly be paid, but they will not be sufficient to retain all the staff RBS needs to compete with its peers. Yet they will be large enough to induce public indignation and outrage on the Labour backbenches. Like most things the Government does these days, it will please no one, and it will not work.