Britain's bankers should not pay themselves big bonuses at a time of poor share price performance, more-or-less explicit tax-payer subsidy and falling living standards for most other workers, Bank of England Governor Mervyn King said on Tuesday.
As banks gear up for their annual round of bonus payments, King said they should put the money aside to bolster against future financial market shocks.
The reputation of those institutions will be affected if their senior executives reward themselves, particularly in a period when the banks, in terms of their share prices, have hardly been stellar, King told a parliament committee.
The current squeeze on living standards has been on people who have been in no way responsible for this crisis, he added at the hearing on British financial regulation.
Bank shares have plummeted over the past year as investors worry about lenders' exposure to indebted euro zone countries and the difficulty of making money as regulation increases.
King said the best way to rein in bonuses and stem public anger at banks would be by stopping them from being too important to fail - and thus needing taxpayer bailouts whenever they got into serious trouble.
Speaking at the same event, Michael Cohrs, a member of the Bank's Financial Policy Committee (FPC), agreed with one lawmaker that it was unacceptable for a top banker at state-controlled Royal Bank of Scotland to receive 4 million pounds.
John Hourican, who heads RBS's investment bank unit, which the government wants shrunk, could receive shares worth up to 4 million pounds this year based on long-term performance awards granted when he took the helm of the business in October 2008.
King reiterated the FPC's recommendation from December that banks improve the resilience of their balance sheets by building up capital levels.
At present the best way to do that is to ensure that rather than distributing a great deal of dividends or compensation, they plough it back into the balance sheet of the banks, King said.
Andrew Haldane, the BoE's director of financial stability, said British banks have done a better job than their continental peers in building up capital and liquidity buffers.
These buffers should also be usable at a time when funding markets for banks are disturbed, he said.
I think we've gone 30 years within the regulatory community without properly emphasising that these rainy day resources are there to be used in a rainy day - and at the moment it's pouring. I think at the moment that message is getting through, Haldane said.
British banks have been allowed to run down their liquidity buffers in the past six months and Haldane signalled the need for similar flexibility for capital cushions as well.
Personally, I would be perfectly happy to see banks' capital ratios falling for the moment in the current weather. That's not the same as them building up the level of capital to guard against even worse storms ahead. I think the rest of the world is slowly waking up to the same point, Haldane said.
Main banks such as HSBC, RBS, Barclays and Lloyds have core capital ratios of around 10 percent or more, among the highest in the world and well above global new rules due from 2013.
Cohrs said they were in good shape but very vulnerable if there was a default in the euro zone.
King repeated his warning that the European Central Bank's efforts to boost liquidity available to banks in the euro zone would not resolve the underlying solvency problems in some euro zone countries.
Britain is worried a draft EU law to reform bank capital rules will crimp the future ability of the FPC to require local lenders to hold more capital during times of market trouble or overheated credit supply.
However, King said that Britain was now winning the argument for more wriggle room and has plenty of allies around Europe, including European Central Bank President Mario Draghi.
(Additional reporting by Fiona Shaikh and David Milliken; editing by Anna Willard)