Allied Irish Banks (AIB) yesterday revealed it will not pay the controversial €40m in bonuses to staff members.
The U-turn was announced after Finance Minister Brian Lenihan intervened and wrote to the bank's board overturning its legal advice.
The minister said payment of the financial support for the State funded institution was conditional on the non-payment of bonuses awarded, "no matter when they may have been earned".
AIB executive chairman, David Hodgkinson, said the board welcomed the minister's actions and was relieved to be in a position not to pay these bonuses.
"We are determined to position the bank to play a full role in the recovery and development of the Irish economy," he said.
"In doing so, we are committed to treating our customers, staff, the taxpayer and the public in a fair and transparent manner."
The High Court last month ordered AIB to pay backdated bonuses to selected staff after the bank failed to enter a defence against a case taken by a trader.
AIB said it had received strong legal advice that it was obliged to pay these bonuses.
"However the letter from the minister conveys a decision by him to legislate which overtakes this obligation," it added.
The letter also highlighted that without the State support, AIB could not have survived until now.
AIB said it appreciates the support from the State and the Irish taxpayers to date and acknowledges it continues to rely on this support for some time to come.
Mr Lenihan welcomed the decision and reiterated his total confidence in the executive chairman and the board.
"I appreciate that AIB was not in a position to put up a sworn defence in the High Court proceedings and that the Executive Chairman and the Board have acted with complete propriety in this matter," he added.
Legislation implementing the proposal will be discussed by Government tomorrow.
However Pat Rabbitte, Labour Party spokesperson on justice, claimed the U-turn was another case where the government and the board of a state funded bank had to be shamed into reversing a decision that was patently unjustifiable.
"What this episode has shown is that the government is not exercising the degree of supervision of the banks that the present crisis requires and that there is still little or no change in the governance culture in the banks," added Mr Rabbitte.Reuse content