RBS set to be first test of bank bailout scheme

Under majority state control, RBS faces a boardroom overhaul

The Royal Bank of Scotland, which is now 70 per cent owned by the taxpayer, is preparing to become the guinea pig for the next stage of the Government's rescue programme for the banks – placing some £50bn-£100bn of loans into the Treasury's new loss-insurance scheme.

The scheme, whereby the banks can, for a fee, insure against losses on unmarketable securities and other assets, was announced a week ago, and RBS will be the first bank to take advantage of it. It should free up the banks' balance sheets for more lending to businesses and households, and help stimulate the economy. The effect is equivalent to taking the assets off the banks' books and transferring the risk elsewhere – the so-called "bad bank" idea.

Ministers seem sure to insist on further changes at the part-nationalised institution, which ann-ounced a loss of £28bn for 2008 after writing down the value of its "toxic assets". Shares in RBS plunged by 65 per cent over last week, with many investors fearing that the latest moves may prove to be a prelude to nationalisation. Such is the effect of share price falls on the stability of the bank that the process may prove self-fulfilling.

Having witnessed the traumas of the last year, culminating in the departure of its chief executive Sir Fred Goodwin, the RBS boardroom is set for more upheaval. Non-exec-utive directors including the chairman of BP, Sir Peter Sutherland, and former civil servants Steve Robson and Jim Currie are thought to be ready to relinquish their roles. The bank's new chief executive, Stephen Hester, and its incoming chairman, Sir Philip Hampton, will oversee the changes at the bank. The new RBS board and other higher management figures at the bank are also likely to have their bonuses monitored by the Treasury and its new holding comp-any, United Kingdom Financial In-vestments. Ministers have rejected the idea of having a representative on the banks' remuneration committees, but their views on bankers' pay are no secret.

Lord Myners, the minister responsible, said last week: "I have met more masters of the universe than I would like to, people who were grossly over-rewarded and did not recognise that... Let us be clear: there has been mismanagement of our banks".

Lord Myners said senior banking executives were "grossly" overpaid, with little sense of the society around them: he could see no economic justification for the "exponential" rises in banking executives' pay. Asked if some bank chiefs should repay bonuses or forfeit knighthoods, Lord Myners said "that's a decision for individuals".

In 2007, some 28 executive dir-ectors in the major banks shared almost £35m of bonuses. Sir Fred, the highest-profile casualty on the UK banking scene, that year received almost £4.2m in salary, including a £2.86m bonus.

Sir Fred will stand down as the head of the Prince of Wales's personal charity, the Prince's Trust, this summer, at the end of his second three-year term. Known as "Fred the Shred" for his enthusiasm for cutting costs, Sir Fred became a Knight of the British Empire (KBE) in 2004 "for services to banking". He is expected to appear before the Treasury Select Committee of MPs to account for his performance at RBS. The committee will interrogate representatives of the auditing firms and credit ratings agencies on Wednesday.

In a further embarrassment for RBS, police are considering launching an investigation into the bank's £12bn rights issue. Scottish National Party MSP Christine Grahame has written to Lothian and Borders Police, asking them to investigate whether shareholders were misled.