By Lana Clements

The chief executive of the tax-payer owned Royal Bank of Scotland, Stephen Hester, has caved into political and media pressure to forgo his bonus, worth nearly £1 million.

Mr Hester revealed he would not be taking the annual bonus, made up of £963,000 of shares in the bank, last night. The move was described as "sensible and welcome" by the chancellor George Osborne. Labour leader Ed Miliband had said he would force a vote by MPs on the issue if Mr Hester were to accept the bonus.

While the move has been celebrated by politicians, the city is less than relieved. Shares dropped in the bank by around 2% this morning, wiping off £350 million of the company's value.

William Wright, investment bank analyst for Financial News, told the BBC: "It sets a very dangerous precedent for RBS. It raises the level of political risk and political interference in the day-to-day running of RBS to what some people many consider to be intolerable levels."

"Shareholders, in this case the UK government, appoint a board, which in turn appoints an executive team to run the bank, and here we have a situation where the board agrees something, which has been signed off by shareholders and then they have been forced into a U-turn by political opinion."

Mr Hester has been credited with pulling the bank back from the brink, making it a less risky company. However, over the last year the share price has still dropped by over 36%.

Further pressure was added when Antonio Horta-Osorio, chief executive of 40% state-owned bank Lloyds Banking Group, declared earlier this month that he would not be accepting his annual remuneration.