Osborne shouldn't treat RBS like his family business The chancellor has interfered in areas better left to managers, writes Jonathan Ford It may have lacked the savagery of the "drive-by shooting" suffered by his predecessor, Fred Goodwin, more than five years ago. But the sudden announcement of Stephen Hester's imminent departure from Royal Bank of Scotland this week has still shocked the City. This is not simply because of the perceived injustice of casting aside a chief executive who has done much to defuse the many financial time bombs Mr Goodwin lodged in the bank's balance sheet before his departure at the height of the financial crisis. Mr Hester may not be a miracle worker but he has proved expert at bomb-disposal. His abrupt dismissal is also troubling because of what it says about the governance arrangements put in place after the British taxpayer took an 82 per cent stake in the bank in the autumn of 2008. Although Mr Hester loyally protested that the decision to dispense with his services had come from the RBS board, the fingerprints of George Osborne, the chancellor, and the Treasury are all too evident. The relationship between the government and Britain's largest and most troubled financial institution has been sensitive ever since the rescue. As RBS was the largest recipient of assistance its activities were always going to be more closely scrutinised than other troubled banks, carrying with it a heightened risk of meddling by ministers. It was in part to shield the bank from such pressures that the government structured the rescue as it did. The Labour administration decided against fully nationalising RBS, leaving a sliver of equity in the hands of outside investors. The idea was to preserve private sector incentives and encourage the state to behave like a conventional shareholder. RBS would be better managed, ran the argument, thus speeding reprivatisation. The government even created an institution, UK Financial Investments, to manage its stakes. One can debate the merits of this arrangement. Some would argue it gave RBS a perverse incentive to defer the recognition of losses while hanging on to peripheral activities, such as the investment bank and the group's US retail operations, in the hope that these might throw off the profits needed to replenish its capital base and deliver a share price recovery. Sir Mervyn King, governor of the Bank of England, has argued that RBS still has too much capital tied up in unproductive assets, and this impairs its ability to lend. But the move had a certain rough logic. Following the crisis, ministers had a responsibility to bring forward banking reforms that would both increase the capital requirement for banks and potentially reduce their returns, imposing a headwind on share price recoveries. Given the clear conflict that existed between these duties and their interests as owners, there was a case for hiving off responsibility for the stakes to third-party managers. The snag is that the arrangements have since mossed up. UKFI has turned out to be a dull backwater. Executives have come and gone with metronomic regularity in recent years. Another issue is the calibre of the RBS board. Never particularly strong - Mr Goodwin packed it with Scottish worthies in his day - it contains few powerful personalities apart from Sir Philip Hampton, the chairman. Unsurprisingly, the government has nosed its way into the power vacuum. Irked perhaps by the failure of Mr Hester's strategy to deliver higher profits, Mr Osborne has increasingly behaved like an owner. The state, as majority shareholder, clearly has every right to remove the chief executive if it lacks confidence in the strategy, and Mr Osborne had legitimate concerns. From the perspective of a government preoccupied with lending to the UK economy, Mr Hester's stubborn attachment to the bank's US arm or its politically toxic trading unit must have seemed puzzling at best. But what the state must not do is to back-seat drive on day-to-day management issues. It is not the government's place to intervene directly in questions such as how much employees are paid or to second-guess decisions to invest in specific lines of business. Those are decisions for managers. But Mr Osborne has interfered in both. There are still real problems to fix at RBS. Last year's technology shambles, when customers lost access to their accounts for several days, cost it credibility with its retail and commercial customers that will take time and effort to rebuild. It was never clear whether Mr Hester, for all his virtuosity with a balance sheet, had what it took to revive a tired and unglamorous retail bank. Whoever RBS finds to replace him and to see it through any sell-off will need that ability in spades. Political meddling will only make that person even harder to find. When the government rescued RBS, it designed arrangements that were intended to prevent RBS and Lloyds Banking Group turning into state-controlled political footballs - latter-day financial British Leylands. There is a danger the coalition has forgotten that for all the difficulties of making these work in practice, the instinct was sound.