Business secretary Vince Cable said banks should be 'very, very self-conscious' about how they reward staff and investors and refused to rule out a tax on bank profits.
Vince Cable today issued a clear warning to the City the Government would be carefully scrutinising bonuses and dividend payouts, just days before the major high street banks begin publishing their latest profit figures, the Guardian reports.
In the consultative Green Paper, Financing a Private Sector Recovery, the Government highlighted recent estimates banks could generate an extra £10bn of capital, which in turn could sustain £50bn of new lending, if they limited bonus payments to levels seen before the financial crisis and dividends were pegged at 2009 levels.
The Green Paper warned there was a risk banks were boosting their profits at the expense of their customers and this "would be a cause for concern and a potential justification for government action".
Cable said the banking commission headed by Sir John Vickers would "almost certainly" call for changes to the structure of the UK banking industry, either through more competition or breaking banks up.
It said the coalition was prepared to extend the lending targets inherited from Labour from state-supported banks to those that had not needed direct taxpayer support.
He added agreements with Lloyds Banking Group and RBS to lend £94bn by next February would remain in force despite the pledge from the coalition Government to use "net" targets rather than the "gross" ones currently used. These gross targets allow banks to ignore the huge volumes of loans being repaid.
Cable said it appeared to make little difference to a bank's lending performance whether or not it was part-owned by the taxpayer.
"I don't want to focus too much on the state-owned banks. There is a danger of putting them at a disadvantage when in truth all banks are being supported by government liquidity arrangements. We are looking at the lending practices of all of them and not just these two (Lloyds and RBS). We want to see evidence of restraint in bonus payments and dividends."
"I am making it clear", Cable said, "that the banks should be very, very self-conscious about bonuses and dividend payments. I also want to make them aware that the Government is not devoid of sanctions it could bring to bear."
The high street banks will next week report first-half figures that are forecast to reveal an estimated £5bn total bonus and pay pot for Barclays, HSBC and Royal Bank of Scotland - the three with investment banking arms.
RBS is expected to report its first profit since its near-collapse in October 2008. Even so, today's annual report from UK Financial Investments, which looks after the stakes in Lloyds and RBS, showed the taxpayer is sitting on an £8.7bn loss on its investments.
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