LONDON (Reuters) - Retail banks should be stopped from paying big cash bonuses and use the money instead to support new lending, according to a speech by shadow chancellor George Osborne on Monday.
"I am today calling on the Treasury and the Financial Services Authority to combine forces and stop retail banks paying out profits in significant cash bonuses," Osborne plans to say in a speech at a Reuters Newsmaker event in London.
"The cash that would have been paid out should be put onto banks' balance sheets explicitly to support new lending," according to Osborne in extracts of the speech released in advance.
"This should be a condition of continuing to receive taxpayer guarantees and liquidity support."
If banks wanted to pay bonuses to senior staff this year, they should be in the form of shares, the speech said.
Osborne's proposal would not affect investment banks.
The Conservatives, well ahead of Prime Minister Gordon Brown's Labour Party in the polls with a national election due by next June, know a crackdown on bankers' bonuses would be popular with many voters.
Bonuses are seen to have contributed to the financial crisis by encouraging excessive risk, but some banks are preparing to step up bonus payments just months after governments were forced to inject trillions of dollars into distressed banks and the global economy.
The government took large stakes in Lloyds Banking Group and Royal Bank of Scotland.
The Centre for Economics and Business Research said last week payouts in Britain would hit 6 billion pounds in this year's bonus round, up by half from 4 billion in 2008 but still well below the 10.2 billion paid in 2007.
Leading Group of 20 countries agreed to compensation reforms last month. Britain's top banks have signed up to the agreement, but there is no cap on payouts.
Chancellor Alistair Darling has promised legislation to end a "reckless culture" of excessive bonuses at financial institutions and the FSA said last week it would take unspecified action against banks that channel profits into bonuses rather than build up capital.
Countering the argument that the government would simply drive banks elsewhere if it cracked down unilaterally on bonuses, Osborne will say that Britain would not be acting alone.
"The Obama administration's new policy will see the pay of the top bankers cut by 90 percent, and banks have been told to pay out in shares instead," Osborne's speech said.
Data released on Friday that showed Britain's economy contracted in the third quarter, dashing hopes for an end to the downturn, meant the government's plan for tackling the recession has failed, according to the speech.
No one believed the government had a credible plan for dealing with the budget deficit, he added in the speech.
"Britain is still in this recession because our economy is starved of credit and starved of confidence. We urgently need an injection of both," the speech said.
He will call for emergency steps to support bank lending, saying his proposal on bonuses would be one such measure.
Brown says stimulus programmes must be kept in place to lift Britain out of recession, but the Conservatives say spending cuts are needed now to rein in a ballooning budget deficit.
Reporting by Adrian Croft; Editing by Richard Chang