Alistair Darling has criticised the "tawdry" treatment meted out to Fred Goodwin after the banker was humiliatingly stripped of his knighthood.
The former chancellor voiced distaste at the way Goodwin had been singled out by the government, while other senior figures escaped punishment.
Politicians from across parties hailed the move, which brackets him with notorious figures such as Soviet spy Anthony Blunt and Zimbabwe's Robert Mugabe.
Leader of business group the Institute of Directors Simon Walker said it was "inappropriate" and there was a danger of politicising "the whole honours system."
David Cameron said it was the "right decision", while Chancellor George Osborne insisted Goodwin represented "everything that went wrong in the British economy over the last decade".
Labour leader Ed Miliband said the punishment was "only the start of the change we need" in boardrooms.
Writing in The Times, Darling, who as chancellor led negotiations over the RBS bailout, insisted: "There is something tawdry about the government directing its fire at Fred Goodwin alone; if it's right to annul his knighthood, what about the honours of others who were involved in RBS and HBoS?"
Goodwin received his knighthood for services to banking under the Labour government, before guiding RBS to the brink of collapse in 2008.
Honours are usually only removed from individuals who have been convicted and jailed.
But the Cabinet Office said the scale of the RBS disaster - necessitating a £45 billion bailout from the taxpayer - made the case "exceptional".
"Both the Financial Services Authority and the Treasury Select Committee have investigated the reasons for this failure and its consequences," the department said in a statement.
"They are clear that the failure of RBS played an important role in the financial crisis of 2008-9 which, together with other macroeconomic factors, triggered the worst recession in the UK since the Second World War and imposed significant direct costs on British taxpayers and businesses.
"Fred Goodwin was the dominant decision maker at RBS at the time.
"In reaching this decision, it was recognised that widespread concern about Fred Goodwin's decisions meant that the retention of a Knighthood for 'services to banking' could not be sustained."
The Forfeiture Committee, made up of senior civil servants, met last week to consider the issue.
Its recommendation to strip Goodwin of the honour was conveyed to the Queen by the Prime Minister.
The Cabinet Office said: "This decision, not normally publicised in advance, was taken on the advice of the Forfeiture Committee, which advised that Fred Goodwin had brought the honours system into disrepute.
"The scale and severity of the impact of his actions as CEO of RBS made this an exceptional case."
In a statement, Cameron said: "I welcome the Forfeiture Committee's decision on Fred Goodwin's Knighthood.
"The FSA report into what went wrong at RBS made clear where the failures lay and who was responsible. The proper process has been followed and I think we've ended up with the right decision."
A spokesman for Liberal Democrat Deputy Prime Minister Nick Clegg said he also backed the move.
Osborne said: "I think we've got a special case here of the Royal Bank of Scotland symbolising everything that went wrong in the British economy over the last decade.
"Fred Goodwin was in charge and I think it's appropriate that he loses his knighthood."
Miliband said: "It is right Fred Goodwin has lost his knighthood but it is only the start of the change we need to see.
"We need to change the bonus culture and we need to change the rules so we see real responsibility across the board.
"As I said in my conference speech, we should not have given Fred Goodwin a knighthood but this should not be about individuals, it is about taking the right steps now to create a more responsible capitalism."Suggest a correction