Mr Hester said the bank, which is 83pc owned by the state, had been "spooked" by the severity of the eurozone crisis into taking "an extra £1bn" of losses for 2011.
"We got spooked by the dangers of the eurozone so we deliberately spent an extra £1bn that we hadn't planned on in losses to go even faster than we had planned in reducing risk.
"You can say to me it's a slight Alice in Wonderland world, where extra losses is a good thing and I completely appreciate the difficulty in the communication of that, but those are the facts," said Mr Hester.
The RBS chief admitted that since its £45bn bailout in 2008, the lender had taken losses when it could "afford" to and used profits to "finesse" its results.
"We have to finesse it with our own profits as we go through. Each year we have, in a sense, a budget for making losses for clean-up – and the better or worse our profits are, the better or worse that budget is and the faster or slower that we can go," said Mr Hester, adding that the bank had "never" had sufficient capital to recognise all its losses upfront.
Mr Hester's comments came as investor consultancy group, PIRC, said the current accounting standards for British banks had obscured "the true financial position" of RBS. PIRC claims the toxic assets of RBS are still overvalued by at least £10bn because of deficiencies in the IFRS accounting rules the bank uses.
Alan MacDougall, managing director of PIRC, said there were "severe deficiencies" in the accounts of Britain's major banks.
"If you know you are going to make a loss, you have an overvalued asset. The problem was that in 2007 RBS was not valuing its assets properly. It was using IFRS and waiting for the losses to happen," he said.
"As we know they not merely overwhelmed the bank, they have overwhelmed the public finances."
The issue of RBS's accounting adds to the controversy the banks faces after saying it would pay out £785m in staff bonuses, including £390m to employees in its investment banking arm. (AtW's comment: shareholders take losses and employees take bonuses, nice... not!)
Mr Hester and Sir Philip Hampton, the bank's chairman, defended RBS's decision to continue paying bonuses despite the lender making its fourth-consecutive annual loss.
"I understand people's anger and anxiety about inequalities in pay at a time when the economy is weak and many people are finding things tough. RBS alone cannot fix these wider issues if we are to achieve what is asked of us commercially. But we have led the way in changing how we pay our people," said Sir Philip.
On average, staff in the investment banking division will received bonuses worth £22,941, compared with £50,114 the year before. Despite the fall in bonuses, the total average pay, which includes bonuses, at the investment banking unit was £112,000, down 26pc year-on-year.
George Osborne, the Chancellor, said the figures showed the Government had succeeded in making the bank the "backmarker in the industry when it comes to pay".
"Our main interest should be to get back as much money as possible for taxpayers and we must not let those that want to create an anti-business culture put that at risk," said Mr Osborne, in a statement on Thursday.
Source: RBS 'deliberately' doubled losses to £2bn in 'Alice in Wonderland' accounting - Telegraph
"We got spooked by the dangers of the eurozone so we deliberately spent an extra £1bn that we hadn't planned on in losses to go even faster than we had planned in reducing risk.
"You can say to me it's a slight Alice in Wonderland world, where extra losses is a good thing and I completely appreciate the difficulty in the communication of that, but those are the facts," said Mr Hester.
The RBS chief admitted that since its £45bn bailout in 2008, the lender had taken losses when it could "afford" to and used profits to "finesse" its results.
"We have to finesse it with our own profits as we go through. Each year we have, in a sense, a budget for making losses for clean-up – and the better or worse our profits are, the better or worse that budget is and the faster or slower that we can go," said Mr Hester, adding that the bank had "never" had sufficient capital to recognise all its losses upfront.
Mr Hester's comments came as investor consultancy group, PIRC, said the current accounting standards for British banks had obscured "the true financial position" of RBS. PIRC claims the toxic assets of RBS are still overvalued by at least £10bn because of deficiencies in the IFRS accounting rules the bank uses.
Alan MacDougall, managing director of PIRC, said there were "severe deficiencies" in the accounts of Britain's major banks.
"If you know you are going to make a loss, you have an overvalued asset. The problem was that in 2007 RBS was not valuing its assets properly. It was using IFRS and waiting for the losses to happen," he said.
"As we know they not merely overwhelmed the bank, they have overwhelmed the public finances."
The issue of RBS's accounting adds to the controversy the banks faces after saying it would pay out £785m in staff bonuses, including £390m to employees in its investment banking arm. (AtW's comment: shareholders take losses and employees take bonuses, nice... not!)
Mr Hester and Sir Philip Hampton, the bank's chairman, defended RBS's decision to continue paying bonuses despite the lender making its fourth-consecutive annual loss.
"I understand people's anger and anxiety about inequalities in pay at a time when the economy is weak and many people are finding things tough. RBS alone cannot fix these wider issues if we are to achieve what is asked of us commercially. But we have led the way in changing how we pay our people," said Sir Philip.
On average, staff in the investment banking division will received bonuses worth £22,941, compared with £50,114 the year before. Despite the fall in bonuses, the total average pay, which includes bonuses, at the investment banking unit was £112,000, down 26pc year-on-year.
George Osborne, the Chancellor, said the figures showed the Government had succeeded in making the bank the "backmarker in the industry when it comes to pay".
"Our main interest should be to get back as much money as possible for taxpayers and we must not let those that want to create an anti-business culture put that at risk," said Mr Osborne, in a statement on Thursday.
Source: RBS 'deliberately' doubled losses to £2bn in 'Alice in Wonderland' accounting - Telegraph
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