January 15, 2014 10:35 pm

Carney attacks EU’s banker bonus cap

Bank of England governor Mark Carney has added his voice to attacks on the EU’s bonus cap, saying it would make it more difficult to reverse payments to underperforming bankers.

Speaking to MPs in London, Mr Carney said Britain had in recent years brought in a “hard touch” regime on bankers’ bonuses and said the BoE’s regulatory wing was preparing to consult on extending the period for which bonuses are deferred.

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Asked whether the EU’s decision last year to push through a “crude” bonus cap of 200 per cent of base salary was the wrong approach, Mr Carney told the Treasury select committee: “absolutely.”

His words jarred with the position taken by Labour leader Ed Miliband, who has called on the government to veto bonuses of up to double bankers’ salaries at state-owned Royal Bank of Scotland.

UK chancellor George Osborne in September challenged the bonus cap in the European court, based on fears that it would damage competitiveness and erode the link between performance and pay.

Members of the European Parliament have claimed the bonus cap will suppress irresponsible risk-taking and are now vowing to close any loopholes that emerge in the rules that have been published by regulators.

Mr Carney, who is also the chair of the global standard-setting Financial Stability Board, made it clear that he shared UK concerns about the EU regime.

The UK had in 2009 put itself at the forefront of international efforts to tighten rules governing remuneration by deferring payments, imposing clawback powers and requiring pay to be in the form of equity, Mr Carney said.

The bonus rules in the EU’s capital requirements directive could now, however, have the undesired effect of simply encouraging bankers to fork out bigger cash packages. “We would rather see more deferral, more equity and this ability to take it back when those risks come to light,” Mr Carney said.

Mr Carney added that the Prudential Regulatory Authority would try to strengthen its regime by consulting on ways of clawing back pay that has been banked by employees and on whether the deferral period should be extended to as long as 10 years – in accordance with a recommendation in a parliamentary report.

He said the critical point was not the level of banker pay, but the “structure”. Asked by Jesse Norman, a Conservative MP, if regulators had “dropped the ball” on banker bonuses, Mr Carney insisted that they had not.

Mr Carney struck a cautious note in testimony over efforts to end the menace of bank failures to taxpayers, saying international discussions over ending the ‘too big to fail’ dilemma would hit a critical moment at the G20 summit in Brisbane, Australia, this year and that it was too early to declare victory.

Mr Carney welcomed an agreement by regulators and central bank governors in Basel, Switzerland, last weekend over the definition of the leverage ratio – which sets a minimum yardstick for banks’ financial strength.

The measure now needs to be fully implemented in national jurisdictions around the world. Mr Carney said he expected the level of the ratio to be “at least” the 3 per cent minimum set in Basel.

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