Banks should step up their lending to support economic growth while taking steps to curb "undue" bonuses, European Central Bank head Jean-Claude Trichet said today.
"Profits earned should be used - as priority - to build capital and reserves, rather than to be paid out as dividends or undue compensation," Mr Trichet told a banking conference in Frankfurt.
He maintained that to weather the financial crisis banks had received government aid "for their role in the economy, not for the banks by themselves."
"The financial sector must not forget that it is to serve the economy and not the other way around," he asserted.
"Compensation and bonuses must remain contained."
Since the start of the global finance crisis in August 2007, brought on by the near-meltdown of the US sub-prime housing market, struggling eurozone banks have had access to financing at favourable rates from the ECB.
As a result banks are now getting back on their feet, with some of them again planning to hand out substantial bonuses and dividends.
Such payments have been blamed for inducing bankers and traders to engage in risky investment ventures that ultimately failed and helped bring on the global crisis.
"We have to understand the concern of our democracies as regards compensation and bonuses," Mr Trichet said.
"The wrong incentives to embark on absurd risks ... have to be eliminated."
Mr Trichet's comments reflect mounting concern among central bankers that banks that have received state backing are using the funds for their own ends rather than to strengthen the economies in which they operate.
"These measures will have to be unwound when the situation normalises," he said, stressing that they would be "phased out in a timely and gradual fashion."
Mr Trichet also warned banks that taxpayers would not tolerate the financial industry returning to excessive risk-taking and bonus payments after generous public support to help the sector through the financial crisis.
"Emergency treatment and strong medicines are sometimes necessary. But, if their use is prolonged, they can lead to dependence and even addiction," he told the European Banking Congress.
"Eventually, the administration of painkillers must be stopped if patients are to get back on their own two feet." Mr Trichet gave no further insights into how the ECB will phase out its liquidity support, after ECB policymakers met today for mid-month discussions ahead of a decision about the exit strategy due at the December 3rd policy meeting.
"As I said on behalf of the governing council, looking ahead, not all our liquidity measures will be needed to the same extent as in the past," he said, repeating key sections from the ECB's last monetary policy statement.
"Accordingly, we will make sure that the extraordinary liquidity measures taken are phased out in a timely and gradual fashion and that the liquidity provided is absorbed in order to counter effectively any threat to price stability over the medium to longer term."
Mr Trichet said that despite recent "benign" developments in the financial sector, it was too early to declare the crisis over.
Banks had to concentrate on shoring up their balance sheets and capital positions, and not use profits to pay dividends to shareholders and boost bankers's pay.
"Our 330 million fellow citizens in the euro area will surely not tolerate a relapse into excessive risk-taking at the taxpayer's expense. Therefore, the financial sector has to secure its future in a responsible and sustainable way," he said.
Reuters/wires