Bank of England governor Mervyn King appeals over bonuses

Mervyn King today made a fresh appeal for fairness in bankers' pay and bonuses (Getty Images)

Bank of England governor Sir Mervyn King today made a fresh appeal for fairness in bankers' pay and bonuses.

Sir Mervyn told MPs at the Treasury Select Committee that banks would suffer damage to their reputations if big rewards were paid out at a time when their performance had "hardly been stellar".

His plea comes at a time when banks are finalising their bonus rounds for 2011 ahead of announcing full-year results next month, amid reports that Barclays boss Bob Diamond could pocket £10 million.

The interim Financial Policy Committee has called on banks to put aside more money to shelter themselves from the eurozone debt storm, including reducing pay.

Sir Mervyn said: "We have been through a crisis where the squeeze in living standards which has been unprecedented, but those affected were not responsible for the crisis.

"I think the reputation of those institutions, whose performance has hardly been stellar, will be affected by the pay of senior executives if they reward themselves with substantial compensation.

"If you expect a market economy to work efficiently, it has to be seen to be fair and the rewards have to be seen to be understood."

But he said the sweeping changes being brought into the banking industry to force banks to ringfence the retail and investment arms will help reduce resentment about executive pay and bonuses, by reducing the need for future bailouts.

Meanwhile, external FPC member Michael Cohrs warned the eurozone debt crisis still posed a serious threat for the UK's banks.

He said that if some of the struggling eurozone countries were to get into deeper trouble, UK banks were "not in such good shape".

Sir Mervyn added that the issue of bankers' pay was of "profound importance" because taxpayers feel their money is being used to subsidise high pay.

At the centre of the problem was banks' "too big to fail status", he claimed, which allows them to borrow money at lower rates because it is understood the taxpayer will step in to rescue them.

He said: "I have not heard many people complain about the returns to people in hedge funds, because they can also lose their jobs and go bust tomorrow. But everyone knows their taxes are not being used to bail them out."

Sir Mervyn was involved in a heated debate with MPs about plans to scrutinise new powers overseeing the UK's financial stability.

MPs had previously suggested that the Bank's governing body, its court, should be rebranded as a supervisory board and given greater powers to review its processes and policy decisions.

But the Bank instead suggested that an internal "oversight committee" of non-executive directors should be appointed, although it would not review past decisions.

The Bank also said a "memorandum of understanding" is being drawn up about when the Chancellor should step in if another financial crisis strikes.

Labour MP George Mudie expressed fears that the Bank was trying to avoid supervision and said he awaited the memorandum "with suspicion".

PA