Financial crisis 'not due to bonuses alone'
Bank bonuses contributed to the financial crisis but were not its main cause, head of the Financial Services Authority Lord Turner has said.
The chairman of the City watchdog said there was a need to "move beyond the demonisation of overpaid traders".
Instead he said "ill-designed policy" had been "a more powerful force for harm than individual greed or error".
Earlier the business secretary warned banks they could face more taxes if they paid "outrageously large" bonuses.
At the Lib Dem's conference in Liverpool, Vince Cable added the government would not be "blackmailed" by banks threatening to leave the UK and there were a range of sanctions available.
'No more bail-outs'
"Absurd bonuses for excessive risk taking" and "an explosion of exotic socially useless product development" had been causes of the crisis, Lord Turner said.
However he pointed to financial regulation which had failed to recognise and address the dangers.
Lord Turner welcomed Basel III rules agreed earlier this month which force banks to increase the amount of capital they hold - including raising the core capital ratio to 7%.
The rules have been designed to try to prevent a repeat of the heady credit-fuelled boom seen in the last decade.
But Lord Turner implied that they did not go far enough saying: "If we were philosopher kings designing a banking system entirely anew for a greenfield economy, should we have set still higher capital ratios than in the Basel III regime? Yes I believe we should."
Despite these reservations, what had been agreed would improve the resilience of the global banking system, without denting the prospects of economic recovery, he said.
Lord Turner also stressed that the public needed to accept that future approaches to control credit markets could mean that there would be constraints on easy credit.
And he said that taxpayers should never again have to bail out financial institutions which are deemed "too big too fail" and that other measures were needed to deal with big, important, struggling banks.
But BBC business editor Robert Peston said that such steps - including new legal arrangements that would force the creditors of those giant banks to convert their loans into loss-absorbing equity - could make funding for banks for expensive.
In June, Chancellor George Osborne announced sweeping changes to the way financial regulation will work in the UK.
Among those measures are creating a Financial Policy Committee (FPC) charged with monitoring the economy, looking at the macro-economic and financial issues that may threaten stability.
It will address any risks it identifies by directing another new body - the Prudential Regulation Authority - to take regulatory action with respect to any financial firm.
Lord Turner said he saw the FPC as the most important element of the reform package as it filled a "macro-prudential underlap" which existed between the FSA and the Bank of England under the tripartite system.