Nigel Lawson, former Tory chancellor, has urged George Osborne to fully nationalize the Royal Bank of Scotland, attacking the banking industry's bonus culture and what he says are its overrated "star" traders.
Lord Lawson said there was a case for paying no bonuses at RBS this year following the Libor scandal, which is expected to cost the bank a fine of at least 500 million pounds ($793 million).
The 80-year-old peer, who sits on the parliamentary commission on banking standards, told the Financial Times that lenders should stop worrying about "losing star performers" if bonuses were cut.
"These are not particularly impressive individuals," he said in an interview. Lord Lawson said the youthful energy needed to be a trader was not in short supply: "They're all of them easily replaced, particularly in today's labor market."
(Read More: RBS Tips UK Back Into Bonus Debate)
The former energy secretary and chancellor in Margaret Thatcher's governments in the 1980s, has been a confidant of Mr Osborne on economic policy and has become an influential figure in the debate on energy.
He argued that RBS, which is 82 per cent state-owned, should be fully nationalized and turned into a vehicle for increasing lending to business.
A "bad bank" would inherit the lender's bad loans, leaving a healthy institution to offer affordable loans to business, putting pressure on commercial rivals to follow suit.
The former chancellor also criticized a decision by the last Labour government to appoint Stephen Hester as RBS chief executive. "It is absurd to put a lifetime investment banker in charge of an entity which is overwhelmingly a retail and SME [small and medium enterprise] type bank."
(Read More: RBS Close to Libor Settlement With US, UK Authorities: Report)
Lord Lawson urged Mr Osborne to heed the advice of the cross-party banking commission, chaired by Tory MP Andrew Tyrie, to "electrify" a proposed ringfence around retail banks intended to make lenders safer.
He said there was a "huge amount of bank lobbying" over the implementation of Vickers commission proposals, which advocated a ring fence to protect high street lenders from riskier investment banking operations.
"They are anxious to appear reasonable and good citizens in the eye of public opinion but that is not uppermost in their mind when they are speaking to ministers," Lord Lawson said.
(Read More: UK's Osborne: Wrong to Abandon Austerity Plan)
The issue of bankers bonuses continues to be a political hot potato as bank chiefs defy political and public pressure to curb payouts
The banking commission urged Mr Osborne to toughen up liquidity ratios for banks and leave a threat hanging over the big banks that they would be broken up if they tried to undermine the ring fence.
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Mr Osborne has reservations but Lord Lawson said he "obviously" hoped that the chancellor would adopt the commission's proposals in full: "We wouldn't have made these proposals if we didn't think they were in the national interest."
The peer added: "I don't think the government needs to be frightened of the banks in the slightest. One does hear from time to time threats that they will up sticks but that's a load of nonsense."
The former chancellor urged Mark Carney, the incoming Bank of England governor, to concentrate on sorting out the banking system. Lord Lawson urged Mr Osborne not to move away from inflation targeting to any form of growth targeting.
"I'm sure Mark Carney is a very clever young man but I think that the government would be mad to move from inflation targeting to money GDP targeting," he said. Money GDP data were "not worth the paper it's written on".
Meanwhile the father of the "Lawson boom" said he saw "signs of strengthening" in the economy but recovery would be a "slow and painful process".