Bankers’ salaries, not just their bonuses, should be threatened if they break the rules, the Bank of England governor has said.

Speaking in the wake of the $4.3bn fines for foreign exchange manipulation, Mark Carney said new pay structures were needed to rebuild trust in the banking system, and reduce risk-taking and short-term thinking.

He floated the idea of senior staff taking some of their salary as “performance bonds” citing ideas set forth last month by Bill Dudley, the president of the New York Federal Reserve.

However, pay experts said the idea could set up a new clash between the UK central bank and European regulators because it may conflict with the European Banking Authority’s views on what can legitimately count as fixed pay.

Regulators are worried that banks are boosting fixed salaries and relying less on variable pay, such as bonuses, weakening the link between performance and compensation.

In European banks, variable pay has fallen from two-thirds of total compensation in 2010 to about half in 2012 and that is before the impact of the EU bonus cap, which came into effect this year.

The UK has launched a court challenge to the cap, which states bonuses should be no more than 100 per cent of salary – or 200 per cent with shareholder approval.

Mr Carney said the bonus cap would have the “undesirable side effect of limiting the scope for remuneration to be cut”.

This, he said, meant there was a case for reform to ensure the burden of misconduct and bets that go wrong is still borne by bankers.

“Standards may need to be developed to put non-bonus or fixed pay at risk,” Mr Carney said in a speech in Singapore on Monday. “That could potentially be achieved through payment in instruments other than cash.”

Tom Gosling, from professional services firm PwC, said: “This is a warning shot from Mark Carney that if we get banks shrinking variable pay so much that executives don’t have enough skin in the game, regulators will find a way of addressing that through changes to fixed pay.”

However, experts said that the bank’s suggestions were difficult to reconcile with an opinion from the EBA last month.

Alistair Woodland, a partner at lawyers Clifford Chance, said: “Mr Carney’s idea on performance bonds clashes with the EBA’s latest opinion in this area, which says that to count as fixed remuneration, a payment to a banker needs to be permanent and non-revocable. His thinking and that of the EBA do not appear to be moving in the same direction.”

Mr Dudley said last month that some staff should be paid partly in “performance bonds” as a way of ensuring that they act in the longer-term interests of the company.

In the case of a large fine, the senior management and material risk-takers on a bank’s staff would forfeit these bonds. The debt could be used to help recapitalise a bank that got into difficulties.

Mr Carney argued that there had been progress in creating a safer financial system following the 2007-9 crisis. The prudential requirements and supervisory framework for banks were now “largely settled”, he said, and the system was fairer because of moves to end implied public subsidies for banks that were too big to fail.

This did not, however, mean the task of reform was over. Steps were needed to secure a more diverse, trusted and open financial system.

The UK’s fair and effective markets review, which is being jointly led by his bank colleague Minouche Shafik, would help, Mr Carney said.

The review will explore ways to improve market transparency, competition and trading infrastructure, he said.

“Principles of fair markets, codes of conduct for specific markets, and even regulatory obligations can all help. There must be clear consequences – including professional ostracism – for failing to behave properly.”

Separately, the UK on Monday set out details of proposals to include branches of foreign banks and investment firms in its so-called senior managers’ regime, which is part of attempts to raise standards in the sector.


Risks outside lenders

Authorities around the world need to shift their focus towards risks outside the banking sector, Mark Carney has said.

The Bank of England governor pointed out in a speech that almost half the $70tn of assets managed globally offered investors redemption at short notice.

These funds were increasingly investing in higher-yielding, less liquid assets. While investors appeared confident that withdrawals from their funds would take place in benign market conditions, this may not turn out to be the case.

Mr Carney said: “Investors are assuming any future withdrawals from funds will be conducted in an environment of continuous market liquidity and that the value of their fund holdings will not fall substantially when they exit. The risks to that assumption are in only one direction.”

International regulators are examining whether certain big asset managers should be designated as systemically important as a prelude to more oversight.

Mr Carney said size may not be the best indicator of systemic importance and regulators may need to assess risk based on the activity of different managers.

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