Video: Yes bonuses could stall the recovery

While the City has worked hard to argue that bonuses are not connected to either recession or recovery it is clear from the Bank of England's Financial Stability Report today that in fact they are.

Buried in typically restrained language the Bank of England today warned that banks must not allow their own desire to pay out bonuses stop them lending.

This is in fact a real risk. Banks face a massive challenge in coming years. Not only do they need to meet ever tougher regulatory rules – most recently the bank tax and Basel III proposals – but they also have to somehow re-finance around £800 billion of borrowing by the end of 2012. This will be a challenge in the current volatile environment.

The temptation will be to carry on paying out big bonuses while struggling to attract enough money to re-finance themselves. In this scenario they may well conclude that they do not have the cash to lend more to the consumer, preferring to preserve their own remuneration over wider economic growth.

Such a scenario could be very difficult. In the same report today the Bank pointed out that if economic growth disappoints a great number of people will be vulnerable to home repossessions as Britain remains far too indebted.

The fact that the Bank of England has warned on this should silence those in the City who make self-serving arguments designed to imply that there is no connection between bonuses and economy growth. There is, not just in the down times but in the recovery too.