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By Rita Nazareth - Oct 14, 2011 9:10 PM GMT+0700

Royal Bank of Scotland Group Plc (RBS) is canceling Christmas for its investment bankers this year as the government-owned lender tries to reduce costs.

The bank will stop subsidizing holiday parties and has banned staff entertainment for the rest of the year, Chris Kyle, chief financial officer of RBS’s investment bank, wrote in an e- mail to employees obtained by Bloomberg News. A spokesman for the lender confirmed the contents of the memo.

RBS reduced its spending on holiday parties to 10 pounds ($16) a head, enough to buy two pints of lager and a packet of potato chips, in 2008 after receiving the biggest banking bailout in the world in the financial crisis. The lender announced 2,000 job cuts at the securities unit in August.

The bank is seeking to “further tighten and minimize the rate of spend on non-staff costs,” Kyle wrote. RBS has also frozen spending on computer hardware, new Blackberries and additional newspaper subscriptions, he said.

“International travel for internal purposes is to cease across all areas” and “travel under four hours duration will be in economy class without exception.”

Employees have also been stopped from organizing off-site meetings and from taking taxis home before 10 p.m., he said. All contractors will take a “mandatory” vacation from Dec. 19 to Dec. 30, Kyle wrote.

The lender may also have to raise capital as European Union regulators force banks to bolster themselves against losses from the region’s sovereign debt crisis.

RBS might need to raise as much as 19 billion euros ($26 billion) of new capital to pass a third round of stress tests, Credit Suisse Group AG analysts led by Carla Antunes-Silva wrote in a note to clients yesterday. Evolution Securities Ltd.’s Ian Gordon said in a note today that RBS has “absolutely no need” to raise more capital because the bank wrote down its holdings of Greek debt by 50 percent in the second quarter.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net