RBS chief says don't "demonise" banks - paper

LONDON, Oct 27 (Reuters) - Reform is needed over bank pay but the sector should not be "demonised," Royal Bank of Scotland (RBS.L) chief executive Stephen Hester was quoted as saying by the Daily Telegraph in its Tuesday edition.

There has been growing international disquiet about the scale of bonuses at banks that received government support.

"Banks need to change the way they pay," Hester was quoted as saying.

"The priority must be to reform the sector, not demonise it. To be successful, we need to be able to pay competitively within whatever regime that politicians and regulators ultimately design."

George Osborne, finance spokesman for the opposition Conservatives, said on Monday British retail banks should stop paying big cash bonuses and use the money instead to support new lending and contribute to an economic recovery. [ID:nLQ179297]

Opinion polls predict Osborne's Conservatives will defeat the ruling Labour Party in a national election due by June 2010.

The Labour government has taken large stakes in several British financial institutions, including RBS and Lloyds (LLOY.L), to help the sector survive the financial crisis, and policymakers have called for an increase in lending in return.

Hester, who was responding after Osborne's comments, said: "We support the need for reform and have taken a lead with the early introduction of deferral, claw-back and non-cash awards for performance related pay."

Investment bank Goldman Sachs (GS.N) recently set aside $16.8 billion to pay staff -- drawing criticism last week from British finance minister Alistair Darling who said some banks manifestly did not understand public outrage at large bonuses. (Reporting by Jonathan Saul; Editing by Gary Hill)