Banks told to curtail move to boost big bonuses

Published on Thursday 22 October 2009 21:37

BRITAIN's financial regulator warned banks yesterday against disproportionately boosting bonus pots at the expense of building up capital buffers, as decent profits return to much of the sector.

Lord Turner, chairman of the Financial Services Authority, also said the FSA favoured a system in future whereby "home" countries would not be solely responsible for rescuing stricken global banks.

The risk could be spread among countries where the bank operated, the regulator said.

Turner said he was comfortable if moderation of both banking bonuses and proprietary trading led to what had to be "significantly higher" capital levels in the wake of the financial meltdown.

Proprietary trading is where a bank trades on its own behalf, sometimes known as "casino banking" because of the risks involved.

"They (the banks] will tell us what they are intending to do on the level of cash bonuses. We will look to their capital levels and the pace at which we want them to raise capital levels," Turner said.

If the FSA was dissatisfied with the trade-off between "aggregate" bankers' bonuses and capital rebuilding, Turner promised "full and frank discussions" between the parties.

He would not be drawn on what measures the FSA would take against banks deemed to be not getting the balance right, but he said: "We have a range of levers that we shall use as deemed appropriate."

It came as unconfirmed reports suggest top earners at financial and car companies bailed out by the US government will see their pay slashed under an Obama administration plan aimed at addressing public outrage over corporate largesse.

The plan is believed to call for halving overall remuneration and cutting cash salary pay-outs by an average of 90 per cent.

Turner's comments on the ongoing banking bonus row came as the FSA issued a raft of proposals yesterday ahead of the second Turner Review conference on 2 November.

He said he remained pre-disposed to no formal divorce of wholesale and retail banking activities along the lines of Glass-Steagall in the US in the 1930s – but there could be some structural simplification within banks to separate those businesses internally.

He said building up extra capital requirements for risky proprietary trading via surcharges remained his preferred option.

"It's very difficult to write a law saying this is what you can do and what you cannot. It's better to do it through the capital requirements," he added.

Bank of England deputy governor for financial stability Paul Tucker told a City audience that the Financial Stability Board of international regulators would be working with the top 25 banks over the next six to nine months to produce "recovery and resolution" plans.

Tucker said: "The desired outputs will cover two things.

"First, recovery plans for 'de-risking' a group, where it can and should be maintained as a going concern. Second, a resolution plan when a firm needs to be wound down and put to rest, but with essential economic functions maintained somehow."

He added that the Bank of England currently favoured a system of "dynamic resilience" for the banking sector to help tame credit booms.

Tucker said: "A required increase in banks' capital resources or liquidity during a period of exuberance would be likely to act, in degree, as a circuit-breaker on domestic credit supply."