Bonus packages for investment bankers are as high as ever, protected by the safety net under the state-owned banks, the Bank of England�s former deputy governor Sir John Gieve said last night.

Bonus packages for investment bankers are as high as ever, protected by the safety net under the state-owned banks, the Bank of England's former deputy governor Sir John Gieve said in Edinburgh last night.

Warning of the "moral hazard" of state support, Gieve told The Herald: "There are some signs that for example in the hiring policy in investment banking we are right back to 2006. There is fierce competition between investment banks for staff with offers of guaranteed bonuses, even though these are banks which are still dependent on public support.

"We need to re-establish market disciplines as soon as we can." But added: "In the short term, in a sense the more they are lending and providing finance, the better."

Responsible for banking regulation at the Bank of England until he retired three months ago, Gieve echoed this week's call by Bank Governor Mervyn King for more Bank powers. "My own view at the moment is that it would be better to keep the supervision of individual institutions in the FSA Financial Services Authority, but to enhance the Bank of England's powers to vary capital and liquidity requirements in banks in a counter-cyclical way."

But he added: "To get some sort of sense of endeavour is as important as where you draw the statutory lines."

Gieve said separating investment and commercial banking was an unlikely remedy, as Northern Rock had been a commercial bank that had failed, while banks which had escaped the crisis such as Santander and JP Morgan had run complicated Treasury operations. "It is not clear that you would make them safer if you cut that out."

Radical measures were needed, but might fall foul of international inertia, he said. "The big risk in the policy world is that the zeal for reform will ebb away, as it appears we may be over the worst."

Gieve, the latest economic celebrity to speak at the David Hume Institute in the capital, quoted Adam Smith's warning that "either the nation must destroy public credit or public credit must destroy the nation", and concluded that "we need to go back to the drawing board not just on financial regulation but on macroeconomic policy and macroeconomics itself".

He admitted that "limiting the size of banks or the types of business they do" would have to be considered.

But the full range of action would have to be agreed and implemented internationally.

"They need to be global at least G20 measures. It doesn't make sense to look at Barclays, Santander or Deutschebank on an EU basis or to apply a regime to them which does not apply to their main competitors from the US or Asia."

Gieve said there were some signs that the global crisis "may have past its most acute phase". But he stressed it was "too early to announce recovery let alone judge how sharp and robust that will be".