George Osborne: Common sense, not envy, dictates that we clamp down on bonuses

The banks have to understand that we are all in this together. I am today calling on the Treasury and the FSA to combine forces and stop retail banks - in other words the banks that lend directly to businesses and families - paying out profits in significant cash bonuses. Full stop.

That includes their investment banking arms. Then the cash that would have been paid out should be put onto banks' balance sheets explicitly to support new lending. This should be a condition of continuing to receive taxpayer guarantees and liquidity support. I am not, of course, referring here to the small cash pay outs to the staff in the branches and the call centres. Nor am I insensitive to the need of Britain's banks to remain competitive and retain their most talented staff.

So where banks do want to pay bonuses this year to those senior staff who have earned them, those bonuses should take the form of new equity capital - shares in the business.

This equity capital will strengthen the balance sheet and support new lending. To those who say that Britain should not act alone, I say we would not be. The Obama administration's new policy will see the cash remuneration of the top bankers cut by 90%, and banks have been told to pay out in shares instead.

America is acting. Britain at the moment is not. The Conservative Party believes in enterprise and a competitive economy. We know financial services have a huge role to play in Britain's future. The politics of envy will play no part in our plans. But we do need the politics of common sense. There can be no justification for using taxpayer support and guarantees to pay cash into the bank accounts of bankers when the rest of the economy is in such desperate need of that cash.

Cash for the economy - not cash for the bonuses. Accelerating the recapitalisation of the banking sector to increase lending capacity must go hand in hand with greater competition to help bring down margins.

The best way to increase competition is to encourage new entrants and limit the ability of the largest banks to dominate the market. We need more smaller banks, competing with the bigger banks to serve families and businesses in a responsible way.

Taken from a Reuters speech given by the Shadow Chancellor yesterday