In an interview with the Financial Times, the peer who is a member of the parliamentary commission on banking standards said RBS, which is 82% owned by the taxpayer, should be taken over entirely and used to increase lending to business.
And the Tory peer who served in Margaret Thatcher's cabinet, said the government should not worry about bankers moving overseas if bonuses are cut.
“These are not particularly impressive individuals," he said of young bankers in the City. "They’re all of them easily replaced, particularly in today’s labour market."
On Friday it was reported that RBS was hoping to claw back £100m in bonus payments to its staff as it prepares for a hefty fine over the Libor rigging scandal.
According to Sky News the bank is expected to pay up to £300m to staff in its Markets and International Banking (M&IB) unit for their work in 2012.
Downing Street has said all banks should "follow a policy of restraint" when awarding bonuses.
Barclays chief executive Antony Jenkins is to waive his bonus for 2012 after a "very difficult" year for the scandal-hit bank.
Jenkins, who took on the role last August, said it was "only right that I bear an appropriate degree of accountability" following a year of devastating reputational blows for the group, including its £290 million settlement for Libor rate rigging.
The move follows reports that Barclays was preparing to pay Jenkins a bonus worth at least £1 million for 2012.
The maximum bonus he was entitled to was £2.75 million - or 250% of his £1.1 million salary.