Jon Moulton, the private equity entrepreneur, criticised bonuses paid by investment banks yesterday and said that banks' credit ratings should be linked to their bonus schemes.

The founder of Alchemy Partners told the Commons Treasury Select Committee that the structure of large bonuses linked to employees' performance in the previous 12 months was “absolutely wrong” because it encouraged short-term risk-taking rather than long-term stability.

Mr Moulton said: “The way people are paid by banks should be part of the way they are assessed for risk. Salaries can be high, but it's the incentive payments that really do the damage.”

Angela Knight, the chief executive of the British Bankers' Association, faced attacks from several MPs on the committee over bonuses.

George Mudie, the Labour MP for Leeds East, said: “I can see the effects of the credit crunch all around me in my constituents, but I can't see it yet in the banks, which had some responsibility for it.”

John McFall, the chairman of the committee and Labour MP for West Dunbartonshire, asked when the banks were going to show “integrity” or “responsibility”.

Ms Knight said that reforming pay structures would have to be agreed internationally because many banks have bases in more than one country, but she conceded: “None of us wants incentives that encourage bad behaviour or too great risk-taking.”

Last month, Mervyn King, the Governor of the Bank of England, said that banks' bonuses encouraged excessive risk-taking that was “not in the long-run interests of the banks themselves”.

The cross-party committee is looking into the role that banks play in Britain's financial stability.

Mr Mudie also attacked banks for allowing the Financial Services Authority (FSA) to take the blame for the near-collapse of Northern Rock.

The FSA admitted in March that it had failed to regulate Northern Rock adequately. The regulator said that there had been a “lack of adequate oversight and review” and that too few officials had been assigned to monitor the mortgage lender, which ran into trouble in August.

Ms Knight said: “We have not run away or hidden from the need for reform or the need for review.”

Mr Moulton said that the FSA should not have been expected to regulate some of the complicated products developed by banks.

He said: “The complexity of some of these markets and products has no limit, and regulators' and directors' skills are limited. Transparency does not solve the problem of people not understanding how they make money.”

European finance ministers were due to discuss the bonus culture last night at a meeting of the Eurogroup of eurozone finance ministers, which does not include Alistair Darling, the Chancellor.

Their agenda included an exchange of views on executive pay based on a European Commission report from last year.

The report said that the short-term pay structure used by many financial institutions had caused them to take on excessive risk without taking into account the impact on the broader economy.

Jean-Claude Juncker, the president of Eurogroup and the Prime Minister of Luxembourg, has said in the past that executive pay rises should be related to corporate performance and that people were losing patience with high executive wages.

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