Osborne and Cable to step up pressure over bank bonuses

Relations between the government and the banking sector still remain uneasy

Chancellor George Osborne is to hold talks with bank bosses next week to persuade them to limit future bonuses and boost lending to small firms.

The government is under pressure to act as banks prepare to award bonuses worth billions of pounds in early 2011.

While hoping executives will act responsibly in the current economic climate, government sources indicate further action cannot be ruled out.

Labour says this is "hot air" and previous sanctions are being diluted.

Mr Osborne and Business Secretary Vince Cable will hold talks with bank executives as political pressure over the issue grows.

The BBC's Business Editor Robert Peston said no meaningful agreement was likely on bonuses and getting more credit to small firms and start-ups at next week's meeting - but it showed the degree of importance placed by both sides on reaching a solution.

Call for restraint

Both David Cameron and Nick Clegg have urged restraint over the level of bonuses due to be paid out in February and March.

The prime minister said steps were already being taken to maximise the amount of tax paid by British banks - some of which are controlled by the taxpayer - and to ensure they make a fair contribution to the process of reducing the deficit.

As well an annual levy on bank balance sheets, expected to raise £2.5bn, Mr Cameron said all the largest banks had now signed up to a code of practice stipulating they will meet their tax obligations in full.

But, speaking at an EU summit in Brussels, he made it clear banks must take into account their "wider responsibilities" when setting bonus levels.

"On the issue of banks, of course we want to see restraint," he said.

"Bankers have to realise that the British public helped to bail out the banks and it is very galling when they see bankers pay themselves unjustified bonuses. The banks have got to think about their social responsibilities."

City tension

Using tougher rhetoric, deputy prime minister Nick Clegg said the government would not "stand idly by" if bonuses were unacceptably high and banks must show "sensitivity" to the prevailing economic conditions facing businesses and families.

Mr Clegg, who has endured a tough few weeks after his party's rebellion over student fees, said recent tension between the City and Whitehall would not end unless there was a "cathartic settlement" with the banks.

"They do not operate in a social vacuum," he told the Financial Times.

"The banks should not be under any illusion, this government cannot stand idly by. It is wholly untenable to have millions of people making sacrifices in their living standards only to see the banks getting away scot-free."

It is understood a one-off tax on bank bonuses, similar to that introduced by Labour in 2009, remains an option if banks are not seen to moderate their behaviour and give more concrete guarantees on loans.

Neither Mr Cameron nor Mr Osborne are believed to be overly keen on the idea, believing that banks have been targeted enough.

But it is thought there could be more action on transparency, with the government making banks publish more details about who is paid what.

'Tarnished'

Far from keeping bonuses in check, Labour said the coalition was encouraging its MEPs to "push for softer European rules".

"Nick Clegg's hot air on bankers' bonuses is designed to rehabilitate a tarnished reputation," Shadow Chancellor Alan Johnson said.

"But he is deputy prime minister in an administration that will not even apply regulations that Labour introduced requiring banks to notify the public about individual bonuses in excess of £1m."

The bonus pool at top banks is expected to be lower than last year as profits from investment banking have fallen but is still likely to total several billion.

While banks argue the paucity of lending to small business is down to weak demand, the Bank of England has said banks need to be more pro-active.