Osborne will say that retail banks should be banned from paying out cash bonuses to allow profits to be channelled into new lending in a speech to the City later today.
He will say retail banks should only be allowed to pay significant bonuses in shares.
The Tories say this will create up to £20bn of new lending. Investment banks would be exempt from the measures but would apply to the investment arms of banks that also lend to consumers.
The Tories say this is an emergency plan that would be temporary and would go alongside the new agreement signed by the banks and the FSA.
Osborne will say: “I am today calling on the Treasury and the FSA to combine forces and stop retail banks – in other words the banks that lend directly to businesses and families – paying out profits in significant cash bonuses. Full stop.
“That includes their investment banking arms. Then the cash that would have been paid out should be put onto banks’ balance sheets explicitly to support new lending.”
The British Bankers Association says: “UK banks understand that stories about high pay and bonuses causes anger and concerns individuals. However, the big bonus culture is not in retail banking but investment banks. Most retail banks are weathering the economic downturn well and have not used any taxpayers money. We have always said that bonuses need to be tied to the long-term success of the business and cannot reward undue risk-taking. Working with our regulatory authorities, we believe the commitment we have now made to this principle is unequivocal and total.
“The UK’s main banks have signed up to the Financial Services Authority’s code on remuneration and they are the first banks in the world to commit themselves in full to the rules agreed at last month’s G20 meeting. But for the agreement to be fully effective these rules must be implemented by all G20 members. Other countries now need to follow where the UK has led.
“Banks are committed to lending to businesses. New business lending is holding up with the stock of lending up four per cent on a year ago. UK banks will continue to support viable businesses and there is no overall reduction the availability of credit. However, as is normal in a downturn, demand remains low with businesses paying back loans and looking to other sources of finance.”
Liberal Democrat Shadow Chancellor Vince Cable said: “The Tories have been deeply ambivalent on the much more fundamental question of what we do about the future of the banking system.
“They have not given full backing to Mervyn King’s proposals on splitting up the banks and these bonus proposals are short term, stop gap solutions designed to stem public anger but which fail to get to the heart of the problem.
“The bonus pool in the banking system derives from the fact that the banks are making profits on the back of taxpayer guarantee. Until a properly regulated structure can be established, banks should be paying the taxpayer a premium for this guarantee.”