The Federal Reserve wants to flex its muscles by vetting the pay policies of America's banks in an effort to tackle concern about multimillion dollar Wall Street bonuses, an issue that is threatening to cause a transatlantic rift at next week's G20 international summit.

By invoking supervisory powers to ensure the financial soundness of banks, the Fed intends to exercise a right of veto over remuneration arrangements that it views as an incentive towards excessive risk-taking.

The proposal, revealed in the Wall Street Journal, emerged just hours after leaders of the European Union's 27 member states met to agree on a push for a cap on bankers' bonuses at next week's summit in Pittsburgh, raising the prospect of a confrontation with a reluctant President Barack Obama.

The Fed believes it can act without legislative approval because it has authority to intervene if it believes that a retail bank is behaving in a way that compromises its financial stability. In the fallout from the collapse of Lehman Brothers last year, Wall Street's two remaining standalone investment banks, Goldman Sachs and Morgan Stanley, converted into regulated "bank holding companies", giving them the ability to take deposits from the public but putting them under the same Fed oversight as any high-street institution.

Top bankers have accepted that the structure of bonus packages contributed to a culture of reckless risk that precipitated the credit crunch. Yet critics contend that Wall Street has failed to change its ways - Citigroup, which lost $18.7bn (£11.55bn) last year, still gave bonuses of more than $1m to 738 of its employees.

In a frank admission, Citigroup's chief executive, Vikram Pandit, suggested to an audience in New York on Thursday evening that one of his own employees is overpaid. A British-born Citigroup trader, Andrew Hall, stands to receive a payout of more than $100m for presiding over a highly lucrative commodities business. When asked whether he believed $100m was an excessive amount for an individual, Pandit replied: "Yes."

Clawback

America's top 25 banks would get particularly close scrutiny from the Fed. But any attempt by the central bank to regulate pay will face opposition from the industry. Scott Talbott, a spokesman for the Washington-based Financial Services Roundtable, said banks have already introduced "clawback" measures to recoup pay from staff whose performance proves poor, together with lengthier vesting periods for inventive schemes to encourage a longer term outlook.

"The threat of failure and the ghosts of other institutions have prompted banks to better manage compensation," said Talbott. "Our concern is that the Fed will place restrictions on sales people that will undermine the ability of companies to produce revenue."

The Obama administration has already appointed a so-called compensation "czar", Kenneth Feinberg, who has the authority to reject any pay deal that he views as excessive at banks in receipt of government bailout funds.

The White House has also thrown its weight behind the introduction of British-style "say on pay" votes giving shareholders a voice on remuneration at corporate annual meetings.

But European leaders want the US to go much further. The French president, Nicolas Sarkozy, says he will walk out of next week's Pittsburgh summit unless a deal is struck to curb bonuses. Despite reservations from Britain, EU leaders vowed in Brussels on Thursday to push for a limit on bonuses. Luxembourg's prime minister, Jean-Claude Juncker, said members had agreed to pursue "an absolute limit on bonuses, in other words a cap".