STAFF at Royal Bank of Scotland were prevented from receiving bonuses worth twice their salaries after Chancellor George Osborne stepped in to block the payments.
The Treasury intervened earlier this year amid fears of a backlash, it has been revealed.
However, MPs have accused Mr Osborne of using an official arm's-length body as a "fig leaf" to hide the degree of his control over the state-owned bank.
The row erupted as MPs also heard claims taxpayers could be closer to getting back some of the money ploughed into the bailed-out bank. The Coalition is closer to selling part of its stake in RBS, a Westminster committee heard.
When the blocked bonuses were revealed earlier this year it was reported they had been vetoed by UK Financial Investments (UKFI), which oversees taxpayers' 79 per cent stake in the bailed-out bank,
However, James Leigh-Pemberton, the chairman of UKFI, told the Commons Treasury select committee that the order had come from government.
His organisation had originally backed the troubled bank's plan to pay staff huge bonuses, he said, because it thought it would help attract and keep talented staff.
Mr Leigh-Pemberton told MPs the Treasury made the decision to block the payouts "in order to avoid a major public controversy".
After the hearing, the chairman of the Treasury committee, Andrew Tyrie, warned there were serious concerns about the influence of the Treasury on the bank.
Mr Tyrie said: "It is clear from Mr Leigh-Pemberton's evidence on RBS's bonus decision that the Government's intervention in the running of the company is substantial. This is scarcely consistent with his assurance that the Treasury operates as a shareholder on an arm's-length basis.
"Whatever the reality, the perception will increasingly be that UKFI is being used as a fig leaf to disguise a high level of Treasury control of RBS, and probably (the other part taxpayer-owned bank) Lloyds too." He said UKFI should be wound-up "and its resources absorbed back into the Treasury."
Meanwhile, there are hopes that an increasing desire for RBS shares from financial institutions and private buyers could see a sell-off sooner than expected.
Oliver Holborn, the head of capital markets at UKFI, told MPs the prospect of the bank returning to private ownership had accelerated this year. He said: "We are definitely seeing more interest from institutions about investing in RBS."
Shares in RBS are trading at 360p, well below the 502p ministers paid six years ago. Plans to sell off the government's 25 per cent stake in Lloyds were cancelled this year because of a low share price.
l RBS has avoided a fine from the European Commission after it blew the whistle on a cartel to rig the Swiss franc Libor rate.
The bank admitted it acted alongside JP Morgan in distorting the pricing between March 2008 and July 2009. Settling the case with the Commission resulted in a fine of £48.6 million for JP Morgan but immunity for RBS as it had revealed the existence of the cartel.
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