The Financial Times late Wednesday, Aug. 1, reported that "senior government figures" were discussing buying out minority investors after becoming frustrated by the Edinburgh institution's lending track record. However, the newspaper said Chancellor of the Exchequer George Osborne opposes the idea and the Treasury Thursday reiterated its aim of returning the institution to the private sector.

"We are committed to repairing and returning RBS to full health so that it is able to support the U.K. economy in the future, and the current strategy is working to achieve that," the Treasury said. "The government's policy has always been to return RBS to the private sector, but only when it delivers value for money for the taxpayer."

Speculation about the fate of Royal Bank of Scotland has punctuated the months since bailouts starting November 2008 made it the biggest beneficiary of U.K. state rescue funding. Although fears about full nationalization were rife in early 2009, with the move advocated by the-then head of the Treasury Select Committee John McFall, recent speculation has concentrated on when the government will sell down or exit its holding, and on potential buyers of the shares.

"Every couple of months there is speculation the government is doing something with RBS. All of them prove wide of the mark," said a person familiar with the situation.

Revived talk of a full nationalization, though unlikely to happen, reflects concern that Royal Bank's performance, as well as its share price, is deteriorating. First-half results out Friday are expected to show that losses have escalated dramatically, in part because of provisions for an embarrassing collapse of IT systems serving British customers in June. Royal Bank is also one of a number of banks under investigation for LIBOR rigging. The investigation last month cost rival Barclays plc $450 million in settlement charges and the jobs of its chairman, CEO and chief operating officer.

At the current price a buyout of the outstanding 18% would cost the government about £4.3 billion, though the Financial Times estimated the likely cost to be £5 billion. Royal Bank's shares early afternoon Thursday were down 4.8 pence, or 2.1%, at 210.8 pence, having drifted lower through the morning. In November 2008 the government paid the equivalent of 655 pence per share - accounting for a 10-for-one stock consolidation this June - for its first tranche of shares.

Oriel Securities Ltd.'s Mike Trippitt and Vivek Raja said nationalization of the bank "would be nuts" and put Royal Bank's poor share price performance down to incoming legislation which will force large lenders to "ringfence" retail operations from investment banking; the Euro-zone crisis, and a "regulatory labyrinth which has deemed many banks and RBS in particular to be 'uninvestable'."

"Maybe the government should just get on and do what is was elected to; fix the economy and stop telling world-class operators such as (CEO) Stephen Hester, how to do their jobs," they noted.

Royal Bank of Scotland declined to comment, as did the Business Department where Business Secretary Vince Cable has made bank lending to small and medium-sized businesses a top priority.