The head of U.S. bank Goldman Sachs said on Wednesday that anger over bankers' pay was understandable and appropriate, and that greater scrutiny of trade in complex instruments was needed to keep banks in check.

But with the banking sector bouncing back from the financial crisis, regulatory overkill could choke off economic growth, Lloyd Blankfein told an industry conference in Germany's financial hub.

I think several months ago took the worst case off the table, and I think the financial markets are in recovery now. So I believe that the worst of this crisis is off the table, he said.

He took a hard line on bankers' compensation, arguing there was scant justification for paying outsized bonuses when a bank had lost money for the year.

Anger over compensation was in many respects understandable and appropriate, he said, adding that Goldman had a clawback tool which let the firm recover some of the bonuses paid if reputational or financial damage ensued.

Multi-year guaranteed employment contracts should be banned entirely. The use of these contracts unfortunately is a common practice in our industry, he said.

HOT TOPIC

Bankers' pay has been a hot topic at the two-day Banks in Transition annual conference, especially as some finance ministers from the Group of 20 countries want to explore ways to rein in bonuses.

Martin Blessing, the head of Commerzbank, said it was time to end guaranteed bonuses for investment bankers, fuelling debate on what role payoffs play in destabilizing the financial system.

I have a feeling that in New York and London guaranteed bonuses are being paid again if people are changing jobs, said Blessing, who last year was the lowest-paid chief executive for a German blue-chip company.

And therefore I agree with (HSBC Chairman) Stephen Green, who said yesterday that bonus payments there should be abolished. I think this is correct, said Blessing, who faces a lawsuit from dozens of London bankers who say they did not get promised bonuses after Commerzbank bought Dresdner Kleinwort last year.

REGULATION

Banks are feeling the heat as regulators, central banks and national governments try to ensure free-wheeling banks do not again pose systemic risks to the financial system.

Central bankers on Sunday proposed a new regulatory framework that would force banks to set aside more profits as a cushion against hard times.

While Goldman's Blankfein acknowledged the financial system needed repair as policymakers tried to restore trust, he said they should not try to shelter the sector from the storm of the century and should focus on making trade in derivatives more open to scrutiny.

This will do more to enhance price discovery and reduce systemic risk than perhaps any specific rule or regulation, he said.

(Additional reporting by Christoph Steitz and Jonathan Gould)

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