RBS chairman denies he threatened to quit over Hester's bonus

"That threat was never raised," he said speaking for the first time since he gave up his own £1.4 million share award and Hester gave up his bonus.

He also said he did not expect Hester to quit over the public and political outcry around his bonus.

He said: "All this is an extra challenge to an already very challenging job. But he's a tough character, an extremely able chap. Very able to turn the business around. The board very much hope he'll continue to do a fine job."

Sir Philip leapt to the defence of his chief executive, saying: "Stephen Hester and his team are doing a great job of fixing the bank and getting it ready to go back onto the markets.

Every 1p on the share price is worth £900 million in value to the taxpayer."

He added: "I do think it is very important that it is recognised that Stephen Hester has one of the most challenging, demanding jobs - literally - in world business. This is a huge bank, absolutely vital to the British economy, systemically important to the world financial system. It got into a terrible mess. Stephen Hester and his team were brought in to sort that mess out."

Denying that there had been direct Government interference in either the decision to award Hester a bonus or his giving it up, Sir Philip said: "It is an issue, we are a very strange beast, at the one time both a fully public company with shareholders, and taxpayer-controlled, government-controlled. Nobody would set out to design a business of that nature and it's a difficult construct to manage."

Asked if the bank had been pushed into its decision to set Hester's bonus below £1 million because of the Prime Minister's comments, Sir Philip said: "The decision in relation to Stephen Hester's bonus was made by the remuneration committee then recommended to the board. We never had the sense that there was an arbitrary minimum or maximum. "

He added: "It was certainly my decision that Stephen Hester should get this bonus. It was very fully considered by the remuneration committee and board. Stephen and I discussed the public reaction at some length. He concluded that the reputation of himself and the bank meant the best course was to waive it."

Sir Philip admitted he had made a mistake by announcing the bonus before other banks - notably Barclays - had announced theirs, which are likely to be much higher.

"It is true we underestimated the scale of the public reaction to the bonus award," he said. "In hindsight, having Stephen Hester as the first to be scrutinised in this way was wrong. We did that because there was so much speculation about it- we thought the speculation itself was damaging."

In a clear bid to defuse the tension between the 82% state-owned bank and its largest shareholder he said: "This is difficult for the Government.

They are a controlling shareholder
with an investment in a business
that needs to be run properly and commercially.

"We consult widely with the Government, and with our other shareholders who still have billions invested in the business. We have a good co-operative relationship with all of our shareholders. For the last three years we've done that reasonably well."