 "RBS faces struggle to fill 'poisoned chalice' CEO role")
Hester's departure, engineered by chairman Philip Hampton with the backing of Britain's finance ministry, means RBS needs an experienced banker untainted by the industry's scandals who is also used to dealing with its biggest shareholder, the government, as well as lawmakers and regulators.
Hester will step down later this year after the bank's board decided it wanted new leadership to oversee the sale of Britain's majority stake in the bank, which could take years.
Hampton said on Wednesday that Hester had been unable to make the necessary open-ended commitment to remain in the job at RBS, which the government bailed out during the 2008 banking crisis.
Investors took the news badly. By 1035 GMT, RBS shares were down around 6 percent to 306.5 pence after earlier dropping 8 percent, underperforming a 1 percent fall in the DJ STOXX Europe bank index and far below the 407 pence price the government regards as the break even on its investment.
During his five years at the helm, Hester oversaw a massive shrinking of the RBS balance sheet, all the while parrying criticism from politicians about the strategy and the size of his bonus.
Only a small number of people would meet the criteria for a new chief executive and Hampton who, will lead the search, admitted there wouldn't be a large number of candidates.
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"There is a relatively limited pool of people. You also have the problem that it is a little bit of a poisoned chalice because of the interference of the politicians," said Heinz Geyer, Managing Director, Temple Associates, a consulting and recruitment firm for the financial services industry.
One possibility could be Justin King, who has rejuvenated the fortunes of retailer Sainsbury over the past 10 years, the first six of which he was working in tandem with Hampton, at that time chairman of Britain's third biggest supermarket. There have been rumours King is ready for a new challenge and he was recently linked with the job of running Formula 1 motor racing.
Britain pumped 45.8 billion pounds into RBS during the financial crisis, giving it an 81 percent stake in what was once the largest bank in the world by assets. Since then, there has been a constant tension between the bank's management and lawmakers trying to influence its strategy.
RBS indicated that it will consider internal and external candidates for the role.
Other external candidates touted by industry sources and analysts include Richard Meddings, finance director at Standard Chartered . However, an investigation into breaches of anti-money laundering activities at that bank last year may have damaged his reputation.
Internal options would include finance director Bruce Van Saun, who is scheduled to move to a new role running the bank's U.S. business, Citizens, from October, preparing it for a stock market flotation. The bank could also consider Nathan Bostock, currently head of restructuring and risk and a former Abbey National finance chief, who is due to succeed Van Saun as finance director.
Bostock and Van Saun, an American who has been finance director since 2009, have both played critical roles in the restructuring of the bank after it was rescued by the British government, with around 900 billion pounds of assets having been shed so far from its bloated balance sheet under a five-year turnaround plan.
Under pressure from the government, RBS has massively shrunk its investment bank and focused on lending to British households and businesses. The bank announced a further restructuring of its investment bank on Thursday, which sources said lead to up to 2,000 job losses.
Speaking on Bloomberg TV, Hampton sidestepped questions about how long he would stay as chairman, raising the possibility he could also go when Hester's successor is appointed.
"Chairmen normally do 5, 6 or 7 years, that's the normal lifespan," said Hampton, who has been in post for four and a half years. "We will want to have stability and continuity given we are changing CEO and when we have a new CEO in place then other aspects of board succession will be addressed."