LONDON (Reuters) - A top British financial regulator accused of ignoring risk warnings quit yesterday as politicians grilled leading bankers over the integrity of the financial system and the size of their pay packets.

James Crosby, the former chief executive of British bank HBOS and adviser to British Prime Minister Gordon Brown, stepped down as deputy chairman of the Financial Services Authority (FSA), saying allegations he ignored risk warnings while at HBOS had already been investigated and had no merit.

"I am totally confident that there is no substance to any of the allegations," Crosby said in an e-mail sent to Reuters.

Brown tried to limit damage from Crosby's resignation, saying the former banker no longer advised the government having completed two reports on mortgages and security issues.

"These are serious but contested allegations ... that he will wish to defend so it is right that he has stepped down," Brown told Britain's lower house of parliament.

The resignation follows accusations by Paul Moore, former head of regulatory risk at HBOS, that his warnings the bank was growing too fast were ignored and resulted in his sacking.

Crosby stepped down on the same day that banking chiefs faced an ongoing parliamentary inquiry into a crisis in which Britain has been forced to nationalise large parts of its banking system.

Executives arriving at the hearing were met by a swarm of photographers and cameramen and a long line of reporters and members of the public queuing to enter the cramped hearing room.

The bankers fended off robust questioning in which Treasury Select Committee Chairman John McFall accused Spanish bank Santander, owner of Britain's Abbey, of having an "utterly duff" due diligence process after its customers ended up with a 2.3 billion euro ($2.97 billion) exposure to an alleged fraud by US financier Bernard Madoff.

Contrite bank bosses echoed apologies at a similar hearing on Tuesday when the former heads of Royal Bank of Scotland and HBOS apologised for the mistakes that brought two of Britain's biggest banks close to collapse.

Barclays chief executive John Varley said it was "perfectly understandable and reasonable" to conclude that banks were more to blame than any sector for the state of the British economy which is in recession.

"It is important for us to be both receptive and sensitive to the spirit of the age as it relates to compensation at the moment," he told lawmakers.

Varley said it would be wrong to assume banks would get rid of cash bonuses altogether while Paul Thurston, UK managing director of HSBC suggested they might be delayed to ensure staff were focussed on long-term goals.

"We are increasingly moving towards deferral of bonus payments so there is an element of cash payments but a payment over a period of time."

In written evidence submitted to Britain's Treasury Select Committee on Tuesday, Moore said being an internal risk and compliance manager at HBOS had "felt a bit like being a man in a rowing boat trying to slow down an oil tanker".

"I certainly knew that the bank was going too fast, had a cultural indisposition to challenge and was a serious risk to financial stability and consumer protection," the memo said. "I told the board they ought to slow down."

Moore told the BBC he had raised his concerns with the FSA, but "they did nothing either". "They want a quiet life," he said.