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Royal Bank of Scotland chief executive Stephen Hester speaks to the Parliamentary Commission on Banking Standards on Feb. 11, 2013. RBS chairman Philip Hampton has defended the $1.2-million bonus due to be paid to Mr. Hester next month.REUTERS TV/Reuters

Royal Bank of Scotland PLC chairman Philip Hampton has defended the bonus due to be paid to chief executive Stephen Hester even though the British bank has been punished for rigging interest rates.

RBS, 82-per-cent owned by the taxpayer, has faced criticism over a deferred bonus of £780,000 ($1.2-million U.S.) that Mr. Hester is set to receive in March. But Mr. Hampton told MPs on Monday that Mr. Hester's pay was modest by the industry's standards.

Mr. Hampton said Mr. Hester's pay was well below the average in world banking. "Relative to other people doing these jobs, his pay has been modest," he told the Parliamentary Commission on Banking Standards.

Mr. Hester, who receives a basic salary of £1.2-million, chose to give up his bonus last year after a computer systems meltdown affected millions of customers. This year he was set to receive a share-based payment of £780,000 deferred from three years ago.

Some MPs have said Mr. Hester should not accept the payment after RBS was fined $612-million by British and U.S. authorities last week for its role in a global interest rate-rigging scandal.

RBS has said it would slash bonuses for its investment bankers to help pay fines to U.S. authorities and ensure that taxpayers do not suffer as a result of the penalties.

But Andrew Tyrie, the commission's chairman, was skeptical whether that would be the case.

"We were not given sufficient confidence today that the arrangement for funding the fines from bonuses will do what it says on the tin," Mr. Tyrie said. "This must be more than an exercise in creative accounting."

Mr. Hampton said the bank was considering writing to former executives to claw back past bonuses to help pay the fines but had not yet done so. He said there was no guarantee such a move would be successful.

"We have no contractual right. It would just be putting pressure on their good nature."

The £87.5-million due to the Financial Services Authority will stay in the U.K. and be donated to charitable causes, including supporting soldiers and their families.

More than a dozen banks and brokerages, including Citigroup Inc., Deutsche Bank AG and JPMorgan Chase & Co., are being investigated by regulators over manipulation of benchmark interest rates such as the London Interbank Offered Rate (Libor) and Euribor, which are used to price trillions of dollars' worth of loans.

The head of RBS's investment bank told the commission that RBS management had failed to spot the wrongdoing because they were focused on keeping the bank alive.

"When we took control of the bank it had a cardiac arrest. We had to prioritize dealing with the existential threat to the bank," John Hourican, who is leaving RBS in the wake of the Libor interest rate scandal, told the panel.

Mr. Hourican said it was important that the bank learned its lessons from the affair. "I have told people who are prepared to listen that they should not waste my death."

Peter Nielsen, head of RBS's markets division, said the bank was unlikely to have made money out of manipulating Libor and also said it had been slow to respond to the wrongdoing.

He said he had discussed resigning with Mr. Hourican in the wake of the affair, but decided to stay on.

Mr. Hourican said he had told Mr. Hester that Nielsen should stay, arguing: "The bank is better served by Peter remaining at RBS."

The commission also interviewed Johnny Cameron, who ran RBS's investment bank under former CEO Fred Goodwin. Mr. Cameron said while the bank had tried to impose ethical values on its traders, it could not control their behaviour.

"You cannot impose moral standards on those that do not wish to be moral," he said, adding Libor manipulation had not been seen as a potential danger for banks. "It just did not occur to anyone that this was a rate that could be fiddled."

Mr. Hester told the commission that, during the boom years, "hubris" had set into the banking industry, resulting in "an extremely selfish and self-centred culture."

He said there had been significant failings in RBS's control processes. The CEO also said there were "three or four ringleaders" among the 21 people identified in regulatory documents relating to the issue.

Taxpayers are currently sitting on a loss of £14.6-billion after Britain pumped in £45.5-billion to keep RBS afloat at the height of the 2008 financial crisis.

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