'Nice revenue source'

This is not the first time Lord Turner has spoken out against large bonuses in the banking sector. He said back in June that the FSA did have "concerns" about executive pay.

And earlier this month, the FSA said it was introducing new rules to ensure bank bonuses are not guaranteed for more than a year, and that senior employees should have their bonuses spread over three years.

These rules are to come into effect from January.

Lord Turner told Prospect that a tax on financial transactions in the City would cut banks' profits, and thereby reduce the funds available for bonuses.

He said such a tax would be "a nice sensible revenue source for funding global public goods".

British Bankers Association spokesman Brian Capon said the UK was the top centre in the world for global banking, "an achievement that we shouldn't take lightly".

"If we introduce the wrong kind of regulation or the wrong kind of taxes we could so easily lose that position by driving business abroad," he said.

The FSA was formed in 1997, and is tasked with regulating the UK's financial services sector.

The G20 finance ministers have laid the framework for a successful G20 summit in Pittsburgh by agreeing in principle to continue the economic stimulus plans worldwide for as long as necessary, and pushing forward plans to reform the global financial system to prevent another crisis.

But beneath the rhetoric, significant differences remain between the US and the UK on one hand, Europe, and the developing countries led by China.

These differences go beyond the rather superficial row over executive pay, where there is far more agreement than one would have thought possible one year ago.

The finance ministers asked the newly created Financial Stability Board to come up with a set of principles to put to the Pittsburgh summit in three weeks time - and indeed the broad principles have been in place since the last G20 in March.

These include the right of regulators to regulate the overall total bonus payments, and the way compensation is paid.

However, like all agreements on international financial regulation, only the principles will be agreed internationally, and the details will have to be implemented by each country's own financial regulator.

So this leaves scope for the French, for example, to be tougher than the UK when it comes to numerical limits on the size of bonus payments.

Political bonuses

But in truth, although important, and politically popular, excessive compensation was more a symptom than a cause of the financial crisis, as Chancellor Alistair Darling confirmed.

The heart of the problem was poor regulation of risk by the regulators and the banks themselves, leading to excessive risk-taking and excessive profits which were bound to eventually lead to a crash.

In a reversal of the usual way the international financial world works, it is now the (usually free market) Americans who are pushing for an accelerated timetable to put in place new, tough requirements for banks to hold more capital - thus protecting the system against risk.

But they got short shrift from the Europeans in the proposal to bypass the existing system in order reach a deal within 15 months on new standards.

US Treasury Secretary Tim Geithner plaintively told his press conference that there was a danger that new standards would not be agreed before the next boom-and-bust cycle begins, and that it was important to maintain momentum while the crisis was fresh in people's mind.

Economic recovery

Since the crisis started, the US, which has been hit earlier and more deeply by the slowdown, has been urging other countries to join in action to stimulate the world economy, arguing that collective action would be more effective than each country acting on its own.

However, with Germany, Japan and France now pulling out their recession, and China returning to 8% growth, it will be increasingly hard to persuade their governments to continue with the same scale of the stimulus in 2010.

In the long term, as Secretary Geithner acknowledged, as the US starts to consume less and save more, it needs other exporting countries (like Germany and China) to buy more and export less - but reorienting either of these very successful, export-led economies could be a long and complicated process.

The UK is in the worst position of all in this debate, not having the fiscal room to have a very large fiscal stimulus plan of its own, unlike the US, yet very dependent on trade, and therefore the recovery in other countries, for future growth.

Running world economy

The biggest question facing the world economy is how to reshape it to reflect the growing economic power of China and other emerging market countries like Brazil and India.

Here the G20 finance ministers sidestepped the tough questions of how to give more voting power to these countries, which inevitably would mean less votes for Europe in the IMF (for historical reasons, small European countries like Switzerland and the Netherlands are over-represented in relation to the size of their economies).

This is going to be a difficult question, with the April G20 setting a deadline of January 2011 for new proposals.

But cheekily the US (which also has a smaller share of IMF voting that its economy would warrant) has joined forces with China in proposing a major cut in the voting rights of European countries, with the US proposing a 5% cut and China 7%.

The failure of the other rich countries, including Britain, to engage in this question now is not encouraging for those who think that the G20 is the beginning of a process of reforming the way we run the world.

And it shows that as well as cooperation, old rivalries are still present in the new international economic order.

But Mr Green said the bank's decision did not mean it was turning its back on London.

"Two-thirds of our business is in Asia. It's where we think the centre of gravity of the world's economy is shifting," he said.

'Learn the lessons'

Mr Green, in Istanbul for the annual meetings of the World Bank and the International Monetary Fund, admitted the banking industry collectively owed the world an apology for the financial crisis.

"It also owes the real world a commitment to learn the lessons. Some of them are about governance and ethics and culture within the industry," he said.

"You can't do all this simply by rules and regulations."

However, commenting on increased regulations for banks, Mr Green said it was "inevitable" that regulators as well as the banks themselves could learn from the crisis.

He added that the industry needed to "pay much more attention to liquidity" than it had done previously.

On Monday, the Financial Services Authority in the UK published new rules governing funding standards at banks and building societies, stating that banks should hold more assets that were truly liquid, such as government bonds.

Moral hazard

In a speech to Scottish business organisations, Mr King said that government support for the banking sector had been "breathtaking" at close to £1 trillion.

"Never has so much money been owed by so few to so many. And, one might add, so far with little real reform," he said.

And he added that measures taken by the government and world leaders had so far failed to tackle the key "moral hazard" that if banks and financial institutions knew that they were too big to fail, and that the taxpayer would help them out if they got into trouble.

G20 plans for tighter regulations may not be enough, because if banks knew they would be bailed out if they hit difficulties, they would continue to take risks, he hinted.

"The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion."

Mr King said banks may have to separate their bread-and-butter businesses - such as holding savings offering loans to households and businesses - which could still be protected. However more speculative practices, so-called casino banking, would not get government protection.

"Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don't, distorts the allocation of resources and management of risk," he said, adding it was "hard to see why" taxpayer support could not be limited to retail banking.

"Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are."

'Powerful and persuasive'

BBC economics editor Stephanie Flanders said that the governor would not have made his comments lightly, wading into the debate by arguing for "separating out the essential, humdrum utility side of banking from the speculative, more casino side that has got us all into so much trouble."

Many, including the chancellor, oppose this plan, seeing it is unworkable, she added.

"But quite simply, Mervyn King thinks that with the current approach, we will only have tackled the symptoms of the problem. The ultimate cause will come back to bite us - perhaps rather sooner than we might have thought."

Banks have been criticised for making risky investments - which in previous years had brought hefty profits and large bonuses for their staff.

However, when these investments went wrong, it contributed to the global economic crisis which saw several banks, including Royal Bank of Scotland and Lloyds, being part-nationalised.

Shadow chancellor George Osborne said Mr King's speech was "powerful and persuasive".

"His analysis of how the government's system for regulating banks failed and how there has been 'little real reform' since is one I share."

Generation suffers

Separately, Mr King said the UK economy would grow in the second half of the year.

However, he did not commit himself to saying the economy had come out of recession between July and September. Initial data on the economy's performance during that period is due on Friday.

And he added that while it should become easier for households and businesses to borrow money, "we should be under no illusion that the path to sustained recovery will be smooth and painless", citing high unemployment and lower industrial output.

"We shall all be paying for the impact of this crisis on the public finances for a generation."

Lloyds, which is 43.5% owned by the government, also confirmed it would stay out of a government-run insurance scheme and would instead raise £21bn, including a £13.5bn rights issue.

But it will have to pay the UK government £2.5bn to avoid joining the Government Asset Protection Scheme (Gaps), which provides state insurance for past toxic loans.

The payment is to cover the "implicit protection" provided by the government since it first offered to insure Lloyds' book in February.

RBS, meanwhile, has confirmed it will join the scheme on revised - and more expensive - terms, the Treasury said.

Bonus deferrals

Both banks have also agreed not to pay any cash bonuses to staff earning more than £39,000, for their performance in 2009, while board members will defer all their bonus payments for this year until 2012.

But compensation could come in the form of shares in subsequent years.

"I believe what we have here is a better deal for the taxpayer," Chancellor Alistair Darling told the BBC.

"It is better in the long run to get private money because at the end of the day, the government does not want to be in the business of running banks," he added.

The BBC's business editor Robert Peston suggested the Treasury had now become, in effect, the biggest hedge fund in the UK.

George Osborne, the shadow chancellor, responded to the announcement by saying: "Let's not miss the elephant in the room."

"The government is having to put another £39.2bn of taxpayer's money into the banks - a bigger bail-out than the original bail-out last autumn. Yet still there is no guarantee that it will get credit flowing in the economy."

'New entrants'

In addition to the sales of RBS branches in England and Wales - originally Williams & Glyn's - RBS will sell its NatWest brand in Scotland, RBS Insurance and Global Merchant Services, its card payment business.

The total disposal will be 318 branches in the UK, or 14% of the RBS retail network.

"I believe today marks a key milestone in the radical restructuring we are undertaking to bring RBS back to stand-alone strength," RBS chief executive Stephen Hester said.

RBS said the moves would cut its UK market share by two percentage points in retail banking.

It will also sell its stake in commodities trader RBS Sempra Commodities.

Lloyds will sell at least 600 branches, or about 4.6% of the total market of UK current accounts.

That includes Lloyds TSB in Scotland along with some branches in England and Wales and mortgage broker Cheltenham & Gloucester, as well as the Intelligent Finance online business.

Lloyds says the businesses that it will have to sell off account for about £30bn of customer deposits and £70bn of lending, generating income of £1.4bn in the year to December 2008.

Mr Peston said the "forced fragmentation" of UK banks was a priority of outgoing European Competition Commissioner Neelie Kroes.

But Mr Darling insisted the government wanted the break-up to happen.

"We were very clear with the Commission that we didn't want to see the banks move pieces around a board," he said.

"I would like to see, perhaps three new entrants to the High Street."

Names like German insurance giant Allianz, Generali and Zurich are being mentioned as potential acquirers for the branches sold by RBS and Lloyds, said Douglas Fraser, BBC Scotland's business editor.

Asset insurance

Unlike Lloyds, RBS will join Gaps and have £282bn of its assets insured by the taxpayer.

That is less than £325bn of toxic assets first proposed in February, according to the Treasury. HAVE YOUR SAY All this taxpayer value for money and better competition talk is just spin and propaganda to hide the fact banks will be continuing under very little regulation John Conroy, Omagh

As a result, the UK government's stake in the troubled banking giant will rise to 84%, though the Treasury said its ordinary shareholding will not exceed 75%.

RBS, which will be the only bank in the scheme, will also get a further capital injection of £25.5bn from the government agreed in February.

Under Gaps, the government insures - for a price - some of the expected future losses on past investments made by our banks.

If those losses crystallised, some of them would in effect be transferred to the taxpayer.

However, if they did not, the taxpayer might make a profit on the premiums that the government would have charged.

RBS will pay the UK government £700m a year to be in the scheme and £2.5bn to exit the scheme, if and when that happens.

'Worst managed'

City Minister Lord Myners told reporters that RBS was "the worst managed major bank this country has ever seen".

"RBS was not brought to its knees by bad regulation, but by bad management and bad governance," he said.

As part of the latest agreement with the UK government, both RBS and Lloyds have agreed to increase lending to businesses and property owners by a total of £39bn.

Shares in RBS fell 1.4% to 38 pence, well below the average price of 50.5p paid by the government for its stake in the bank.

Lloyds was up 5.9% at 90p, also below the 122.6p price the government took to bail out the bank.

Banks welcomed the ruling, said there had been major changes to current account packages recently, and pointed out that these unplanned overdraft fees could be avoided.

Seven banks and one building society wanted the court to overturn two previous rulings that said the OFT had the power to investigate unauthorised overdraft fees.

Historic claims

Those who received payments from banks before the test case started will keep their money, because these pay-outs were made as "goodwill gestures".

All new claims against banks were effectively suspended in July 2007 when the OFT and the banks agreed to stage the test case to see if the overdraft charges were legal or not.

The OFT has previously said that even if it lost, it would still try to use other powers, perhaps by instigating a full Competition Commission enquiry, to attack overdraft fees.

In explaining his ruling, the Supreme Court's president Lord Phillips said that bank customers agreed to pay overdraft charges as part of the price of having a current account, so they fell outside the scope of the 1999 consumer contract regulations.

But Lord Phillips added that this was not the end of the matter as the OFT could still try to scrutinise bank charges under other parts of the regulations.

"This will not close the door on the OFT's investigations and may well not resolve the myriad cases that are currently stayed [put on hold] in which customers have challenged the relevant charges," he told the court.

The judge did not give any explicit guidance as to how the judicial authorities should deal with the frozen cases.

Later the Judicial Communications Office said that each case would be considered on its merits by County Court judges.

It has effectively said that people should apply to the court if they want their cases restarted, but there is no guarantee that they will succeed. Banks might also apply to have cases thrown out.

However, it said the Supreme Court judgement was quite lengthy so it could take some time for customers and the banks to decide what to do.

The Supreme Court ruling will come as a bitter blow to the consumer organisations who have campaigned against what they considered to be unfair overdraft charges.

The Court said it would not allow an appeal by the OFT to the European Court of Justice.

'Shock'

The OFT said that it was "disappointed" with the judgement.

"The OFT will now consider the detail of this judgment before it makes a decision on whether or not to continue its investigation into unarranged overdraft charging terms," it said in a statement.

"It will also explore with others the implications for consumers and for existing and future legislation and regulation."

It said it would make another announcement in December.

Research by the OFT published last year found banks earned around a third of their retail revenues from unarranged overdraft charges that were "difficult to understand, not transparent, and not subject to effective consumer control".

Marc Gander, of the Consumer Action Group, said that he was "shocked" about the Supreme Court ruling.

"This is completely unexpected. It is a devastating blow," he said.

Phil Jones, from the consumers' association Which?, said that he was "utterly outraged" by the ruling.

But Martin Lewis, of Moneysavingexpert.com, said: "This may be a setback for reclaiming but it is not the end. The likelihood is the money is not coming back for anyone who has got claims on hold. There is still hope here, but we have got to do a lot of reading and a lot of legal work."

Some of these campaigners said that the OFT could explore other avenues to tackle the banks about charges, but this would require another round of litigation.

Banks' response

The British Bankers Association, which represents the banks, said it considered the decision as a "clarification of the law" rather than a "victory".

"We recognise this issue has been of real concern to a large number of our customers and we are pleased that this decision now brings clarity for all parties," it said.

"The banks will work with the regulators to ensure that the outstanding customer complaints are brought to a swift conclusion."

Angela Knight, from the BBA, was asked whether they would continue to make unauthorised overdraft charges.

"The banks are mindful of their customers, they know the concerns of those who have paid the unauthorised overdraft fees and those who have not," she said.

"Individuals can avoid any charge by putting their overdraft arrangements in place first."

Asked about the case at Prime Minister's Questions, Gordon Brown said that it was correct to examine the fairness of charges.

He said government-supported banks - Northern Rock, HBOS and RBS - had recently been asked to review their overdraft charges so that they were fairer to customers.

Sarah McCarthy Fry, Exchequer Secretary to the Treasury, said the government was "determined" to make sure the system was made fairer in future.

"Consumers, who have been waiting a number of years, will be extremely disappointed with this outcome.

"It is clear that in the past, banks were not thinking enough about their customers. That needs to change for the future.

"The government will work with the OFT and Financial Services Authority to reach a new framework for fairer bank charges going forward."

Shadow Financial Secretary Mark Hoban said: "This is a blow for consumers. The OFT have said they will explore the use of other powers to investigate and we support that. We have already called for a competition review of banks - it must include consumer banking charges.

"In the meantime this judgement simply perpetuates the uncertainty over bank charges which is damaging for the entire industry."