Christine Lagarde, the managing director of the IMF, has warned that "corrosive" inequality was hindering the world's economic recovery.
In a combative speech to an audience of some of the world's wealthiest financiers at the World Economic Forum, Ms Lagarde said that bankers' pay should be cut to close the gap between the rich and poor. "Excessive inequality is corrosive to growth; it is corrosive to society. I believe that the economics profession and the policy community have downplayed inequality for too long" she said.
Ms Lagarde, a former French finance minister who was appointed head of the International Monetary Fund in 2011, added that it might be necessary for nations to impose minimum wages in order to reduce income gaps.
"I believe policies such as robust social safety nets, extending the reach of credit, and – in some cases – minimum wages can help" she told the audience of business and political leaders in the Swiss ski resort of Davos. Ms Lagarde also warned that necessary reforms of the multinational banking sector, which plunged the Western world into recession in 2008-09, were being watered down by industry lobbying.
"We can already see too many signs of waning commitment – dilution of reforms, delays in implementation, inconsistency of approaches. And we can see the risks – a further weakening in capital and liquidity standards; and not enough progress on key areas like cross-border resolution, shadow banking, and derivatives" she said.
Ms Lagarde told delegates that bankers' pay is too high. "We must move in the direction of more prudent compensation practices" she said. "Ultimately, this is all about accountability: we need a financial sector that is accountable to the real economy– one that adds value, not destroys it"
Ms Lagarde was speaking after Jamie Dimon, chief executive of US bank JP Morgan, launched a scathing attack on banking regulators, who he accused of botching attempts to protect taxpayers from future bailout costs. "We're trying to do too much too fast, we should just focus on the basics" he told delegates in Davos. He added that regulatory attempts to cut large banks, such as his, down in size was wrong-headed and that the sector had been the subject to a campaign of "scapegoating and misinformation". Mr Dimon also apologised to JP Morgan shareholders for the "London Whale" fiasco which saw the Wall Street giant rack up trading losses of $6bn last year – but added that "life goes on".
The chief executive, who saw his bonus cut in half to $10m over the Whale fiasco, said that none of the bank's customers were hurt by the losses and insisted that the affair could not be bracketed with other recent offences such as interest rate manipulation and money laundering.
JP Morgan is the largest US bank with $2.36 trillion in assets. Despite the London Whale losses, the Wall Street firm still posted record profits of $5.7bn for 2012, up 54 per cent on 2011.
Tidjane Thiam, the chief executive of the Prudential and another member of the Davos panel, backed Mr Dimon's rejection of the idea that some banks are too big. "Nobody can say what the optimum size of the financial sector is," he said. "It's not a useful debate".
Another issue under discussion at the hectic first full day of the World Economic Forum – which was attended by a star-studded list of global influencers including Microsoft founder Bill Gates, Russian prime minister Dimitry Medvedev and Hollywood actress and HIV/Aids campaigner Charlize Theron – was the ongoing eurozone crisis.
Min Zhu, the Chinese deputy director of the IMF, said that the risk of a break up of the single currency had receded since the European Central Bank president Mario Draghi pledged to buy up the bonds of struggling member states such as Italy and Spain.
However, Axel Weber, the former head of the Bundesbank and now chairman of the Swiss bank UBS warned that the ECB's intervention promises were sowing the seeds of a future, even larger, crisis. "We are living a better life at the expense of future generations. We're trying to keep a speed limit for our economies that is unsustainable" he said. "The deeper issues are still there. They [the ECB] can't solve solvency problems they can [only] buy time".