Bank bonuses may have come from bail-out cash

Bosses of Britain's four major banks were grilled by the Treasury Committee today in a session which revealed that some money given to bail them out may have been spent on staff bonuses.

In an admission which will stun taxpayers, LSE:RBS:Royal Bank of Scotland boss Stephen Hester said in response to a question from Conservative MP David Ruffley that he believed some of the bail-out cash may have been used to pay bonuses.

RBS, which made a loss of more than £1 billion last year, is 83%-owned by taxpayers. Hester's £7.7 million pay package was signed off by the government in April after it emerged that details of the additional £4.5 million potential shares windfall - on top of his £2 million annual bonus and £1.2 million salary for 2010 - had not originally been revealed under the Project Merlin remuneration agreement. RBS also admitted that 323 of its staff were paid almost £1 million each last year.

Narrow banking?

The Treasury hearing was called to discuss their retail and investment businesses and to examine the proposals put forward by the independent commission on banking (ICB). It is also the first opportunity for MPs to question why Bank of England figures show leading banks have missed targets for lending to small firms.

Hester was joined at the session by Douglas Flint, the chairman of HSBC (HSBA), Bob Diamond, chief executive of Barclays (BARC) and Antonio Horta-Osorio, the new chief executive of Lloyds Banking Group (LLOY).

It followed a meeting of the Business Committee which was told by business secretary Vince Cable that the government is willing to take "further action with tax on banks" if they do not increase lending to small and medium-sized enterprises (SMEs).

He said lending levels to this group remained a 'serious problem', despite the four banks having signed up to the government's Project Merlin agreement to provide more credit for business.

The full report from the ICB - designed to avoid the 'too big to fail' situation - is due in September. It proposes greater separation between the retail and investment arms of banks but has not yet gone as far as suggesting that they should be split.

When questioned on this issue, Hester and Flint were apparently at odds, with the latter conceding that some kind of ringfence is necessary, while Hester said it would "increase some of the systemic risk and decreases ability of bank to withstand risk".

Horta-Osorio has already criticised the ICB's recommendation that a planned sale of 620 Lloyds' branches required to meet European Union state aid rules be increased to help boost UK competition.