Paul Tucker warns ‘worst may still be ahead’ for the financial sector

THE deputy governor of the Bank of England yesterday warned there was a “tangible probability” that the worst of the financial crisis may still be ahead as he unveiled possible fresh curbs on banking bonuses.

Paul Tucker, thought to be the front-runner in the race to next year succeed his boss, Sir Mervyn King, also said that if UK banks ever again had to be bailed out by the taxpayer, then “the backlash would be uncontainable”.

Tucker, discussing future systemic risks to the financial sector, said: “There’s a tangible probability, not a high probability, that the worst is still ahead.”

A Bank of England lifer, Tucker also told the annual meeting of the British Bankers’ Association (BBA) that Basel III rules to beef up global bank balance sheets were still “not calibrated for end- of-the-world [type] risks”. Tucker added that in any future financial crisis, UK banks “might be grateful” for some extra billions of pounds in reserve firepower over the Basel requirements.

The deputy governor told 300 bankers at the central London gathering that one way to restore “safer finance and more honest finance” was to pay bonuses partly in subordinated debt – which ranks lower than other forms of debt – rather than traditional share options.

That way bankers would have “a significant financial stake not just in the prosperity of the firms, but also the survival of the firms,” he said, adding they would have a “powerful incentive” to stop banks failing. Tucker said he welcomed new entrants into the British banking market and putting in resolution and recovery plans – so-called living wills – for existing players would help advance that.

He said: “We want to reduce barriers of entry into banking. That’s made much easier to do if you make it easier to close banks down.”

The meeting was attended by the chairmen of all five big British banks, who again apologised for the past excesses of banking remuneration. Sir Philip Hampton of Royal Bank of Scotland and Douglas Flint, the Scots-born chairman of HSBC, were among those who said it was right changes had been made to how bonuses were paid, including deferral and clawbacks.

Hampton said some of the excesses had been “grotesque”, while Flint defended the public outcry, saying some instances where bonuses were unlinked to performance were “utterly wrong”.

Flint added: “I do not think people have got a hang-up on [banking] pay.” The group of chairmen, which also included Sir David Walker of Barclays and Sir Win Bischoff of Lloyds, said the issue had now moved on from repairing the balance sheets of banks to cultural change to restore public confidence.

Asked in a panel discussion when RBS’s recovery could lead to the government selling down some of its 82 per cent holding in the bank, Hampton said it was “a reasonable aspiration to start selling the shares before the next general election”.

On the rumbling payment protection insurance mis-selling scandal, Martin Wheatley, chief executive designate of the coming new Financial Conduct Authority, told the meeting: “PPI has resulted in a huge clean-up. It’s akin to an oil spill in relation to the ongoing damage.”

Anthony Browne, recently appointed chief executive of the BBA, said it was chastening for the industry to realise that only 28 per cent of people thought they could trust the high street banks.