In an escalating battle over bonus payments, the RBS board was reported to have sought legal counsel after Alistair Darling insisted that the Treasury had the “right to consent” to how much the bank paid in bonuses and how it paid those bonuses.

The Chancellor cannot contemplate the political cost of huge bonuses from the virtually state-owned bank, which would hit the headlines in February as the Government is gearing up for a General Election campaign.

Yesterday the City minister, Lord Myners, took an uncharacteristically strong swipe at the banking industry and the bonus culture in an apparent response to reports that RBS has told the Government that it must increase bonuses by 50% this year to remain competitive.

Last year RBS, which is 70% taxpayer-owned, paid £900 million of bonuses in its investment bank, and it is reported to have told the Treasury it expects to pay up to £1.5bn in bonuses to its investment bankers this year. Including bonuses for retail staff, the bank could be paying out bonuses totalling £2bn. Despite the economic climate, RBS’s investment bank has generated some £6bn of profit this year.

Last night the bank stated that no bonuses had been fixed for this year and that it was sensitive to public concerns about “no rewards for failure”. However, it was reported that legal advice sought by the board stated that directors would have to quit because a veto on bonuses, which they believe to be essential to preserving the value of the bank, would mean that it would be prevented from taking actions perceived to be in the interests of shareholders.

The bank said it could not comment on legal advice to the board. An RBS spokesperson said: “Our agreed business plan requires us to operate commercially in competitive markets and this plan underpins the prospects of recovering value for taxpayers and other shareholders alike. UKFI -- the arm’s-length Government com­pany that handles the Government stake in financial institutions -- has to date engaged with us positively in reiterating this goal and we expect that to continue.”

Both the bank and the ­Government could be damaged by a public spat, as evidenced by a fall of £1bn in the market capital of RBS yesterday. The bank board insists that it must act on behalf of shareholders -- code for competitive bonuses -- against Mr Darling’s explicit veto over bonuses as a condition of providing £25.5bn of new capital to RBS and insuring £282bn of its loans and investments against losses under the Asset Protection Scheme.

Vince Cable, for the Liberal Democrats, said: “I would welcome their resignations as the bank cannot hold the taxpayer to ransom.”

As the Chancellor yesterday fought off attempts by the EU to exercise regulatory control over the City of London, Lord Myners warned that at least 5000 UK bankers would earn more than £1m this year unless action was taken.

There was “precious little evidence” that people at the top of banks appreciated “the concern about these extraordinary levels of income”, said Lord Myners.

He told the Lords: “I think the real responsibility here must lie with the shareholders. Accordingly, I have written to the National Association of Pension Funds, the CBI and the TUC urging them to use their influence to persuade trustees to ask their fund mangers: ‘What are you doing to stop these quite unreasonable and unjustified levels of remuneration?”’

Prime Minister Gordon Brown said procedures for bonuses had been agreed internationally by the G20.

"Every country in the world has legislated to create new bonus policies to restrict bonuses both in terms of the eligibility and in terms of the conditions attached to bonuses," he told reporters at a Downing Street press conference.

"So a one-year's bonus has got to be proven to be a lasting reward for performance over a number of years, and there is a clawback system which is internationally agreed as well."

Mr Brown said the Government would legislate for the new restrictions in the Financial Services Bill, adding: "I think most sensible people around the world would accept that if we come to a worldwide agreement about what the bonus structure should be then every major bank in the world will want to follow that. And nobody is being discriminated against because every bank is having to follow these procedures.

"So I hope we can find a way forward on this that is consistent with the international agreements we have reached with other countries - that America, the rest of Europe and the rest of the world will follow us."