bank's partners were paid a percentage of the pre-tax profits but, crucially, their agreements also contained shared liability clauses. If one partner screwed up, they would all suffer. That natural brake was removed once the bulk of a bank's capital was owned by external shareholders. And the emerging bonus culture received a further boost during the deregulatory splurge of the 1980s and 1990s.

What happened then?

London's 1986 "Big Bang" saw the abolition of fixed commissions on trades; it also opened the doors to US brokerage houses with their more aggressive attitudes to risk and reward. The stakes became higher still following the 1999 repeal of the US Glass-Steagall Act, which had enforced a rigid separation between investment and commercial banking: suddenly bonus-driven investment bankers had giant balance sheets to play with. Ominously, this coincided with the development of ever more complex debt-based derivatives products which multiplied the scope for booking instant profits.

And why did the authorities play along?

Although the cult of the bonus was cited as a contributory factor in the 1987 stock market crash and the dotcom bubble, the rewards of light-touch regulation were felt to be greater than the risks. This was particularly so in London, which took advantage of America's regulatory clampdown following the dotcom bust to challenge New York as a global financial hub, particularly in the booming derivatives market. By 2007, Britain's financial services sector accounted for nearly 10 per cent of British GDP, generating crucial tax revenues for the Treasury. The then Chancellor, Gordon Brown, declared a "new Golden Age" in the City.

Has Gordon Brown changed his tune?

Yes. The PM is leading the backlash against the "irresponsible" bonus culture and the "excessive risk-taking" it has spawned. Reform now looks inevitable, not least as it's seen as a crucial step in restoring public confidence in the banking sector. The Financial Services Authority has already outlined some of the short-termist practices it would like stamped out. They include: linking bonuses to one year's performance rather than average performance over a number of years; paying bonuses entirely in cash rather than in shares or share options; and allowing traders to assess the value of their own positions when bonuses are calculated. The City watchdog will also demand that banks which continue promoting risky incentive structures will be required to hold more capital. Yet the authorities are only too aware that they must tread carefully or risk hobbling the City permanently, particularly given rising competition from the new financial centres of the East.