The Prime Minister Gordon Brown said that the Government will introduce regulations which will not allow the banks “to trade in the way you want to trade” if they insist on paying “rewards for failure.”

“We are creating a system for the future that is based on long-term performance not short-term rewards,” he said last week, speaking during a question and answer session on a visit to Coventry University .

The Prime Minister’s determination to take a harder line on the controversial issue of bonuses in the banking industry follows criticism from Conservative leader David Cameron, who has said that banks should not pay any cash bonuses over £2,000 if they have received significant help from the taxpayer.

During an interview on the BBC Politics Show, Mr Cameron said: “People who work hard are seeing billions of pounds of their tax money being paid out and are rightly angry about it.”

He also attacked the Labour Government for failing to take steps to prevent the payment of bonuses by those banks in which the taxpayer has taken a stake, such as RBS, Lloyds TSB, Bradford & Bingley and Northern Rock.

Meanwhile, despite admitting that the watchdog did not focus enough on the excessive risks being taken by banks, the Financial Services Authority (FSA) chairman, Lord Turner, has defended the payment of bonuses to its staff, explaining that employees joined the FSA “on the basis of variable pay”.

Speaking on the Andrew Marr Show, Lord Turner said that to refuse FSA staff a bonus would be comparable to them taking a 15 per cent pay cut, so the payment of bonuses is therefore “appropriate.” He added that bonuses are essential to attracting high quality staff in order to rebuild the UK’s banking system.

However, chief executive of the FSA, Hector Sants, has told Lord Turner that he will be waiving his right to a bonus, in the wake of intense criticism aimed at the banking industry for banks that are awarding bonuses.

However, many analysts have defended bonuses for some bank staff saying there are lines being drawn between executive level employees who are responsible for the banks’ business models, and lower level staff who should not be punished for their employer’s bad judgment.

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