Bank of England governor's comments to the Treasury select committee will add pressure on the major banks to restrict bonus payments to senior staff due to paid in the next few weeks

The Bank of England governor, Sir Mervyn King, has warned the UK's leading banks to rein back on bonus payments or risk a backlash from the public.

King said market capitalism should not only work efficiently but should be seen to be fair; huge bonus payments in a time of austerity and declining average incomes would be viewed as unfair by most people.

His comments to the Treasury select committee will add pressure on leading banks to restrict bonus payments to senior staff due in the next few weeks.

EU rules have revealed that Goldman Sachs paid £4m on average to its top-flight staff in London in 2010. Goldman Sachs' profits are expected to fall when the bank reveals its 2011 results. Like most Wall Street operations, Goldmans suffered a drop in business during 2011.

Morgan Stanley, another hard-hit Wall Street investment bank, is understood to have told staff that cash bonuses will be capped at $125,000 (£82,000), although they could still be handed stock.

The governor's call for restraint came just days after Lloyds Banking Group boss António Horta-Osório announced he would not take a payout that could have been worth £2.4m, citing the "tough financial circumstances of people'' as well as the bank's poor performance and his two-month long sick leave. However, state-owned Lloyds and RBS are still believed to be preparing multimillion-pound payouts to some staff .

King said: "If we could reduce the situation where banks are too big to fail then we would reduce the revenues made on financial instruments and the excessive profits banks make. That is what will end the excessive payments in our banks." He was giving evidence to MPs on proposals for greater oversight of the banking system to prevent another financial crisis. The government has put forward plans for a financial policy committee (FPC) inside the Bank of England to monitor the finances and activities of systemically important banks.

Andy Haldane, the Bank of England's director of financial stability, said banks had increased their capital buffers but another credit crunch would make them vulnerable to collapse.

"We have gone 30 years without properly emphasising that these rainy day resources are there to be used in a rainy day, and at the moment it's pouring.

"I would be perfectly happy to see banks' capital ratios falling… in the current weather."

FPC member Michael Cohrs said many foreign banks were in a worse situation than UK banks and more vulnerable to collapse. Cohrs, a former investment banker at Deutsche Bank, warned that UK banks would be harmed by a deterioration in the eurozone's economy, but were not the first in line.

King rejected plans to use the Bank of England's 12-strong court to oversee the handling of the next financial crisis in favour of a committee of non-executive directors with powers only to review decisions in retrospect. King said plans by MPs to use the court amounted to allowing the Bank to oversee itself. He said a separate independent committee could look back at the processes used by the FPC in its handling of a bank collapse to learn lessons and verify that best practice was followed.

Labour MP George Mudie accused the governor of recommending a scheme that allowed him and other bank officials to conduct bank rescues in secret and without proper oversight.

During a heated session of questioning about the proposals that will govern the bank's activities in a crisis, Mudie said King was pushing back on proposals for closer scrutiny. "This is an example of your need to throw your toys out of the pram every time someone questions your empire," he said.