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PRA warns EU bonus cap will create riskier banks

Prudential Regulation Authority chief executive Andrew Bailey has slammed the EU cap on bank bonuses warning it will create riskier banks and make regulation “more difficult”.

Speaking to the Treasury select committee today, Bailey threw his support behind a UK court challenge to the law by providing an expert witness statement.

Last year the UK was outvoted 26 to one to introduce an EU wide cap on bonuses at 100 per cent of salaries, or 200 per cent with significant shareholder approval.

The EU bonus cap comes into effect later this year but Bailey said banks are already pushing up fixed remuneration in this year’s bonus round to circumvent the cap.

He said regulators need to be able to cut variable pay to boost bank capital during future shocks and increases to fixed pay make this more difficult.

He said: “I do detect a pressure to increase fixed remuneration at the expense of variable bonus. It raises two concerns; firstly, it risks reducing the ability of banks to cut remuneration and therefore build capital and secondly, it risks creating the wrong incentives.”

Bailey said regulators have tried to improve incentives and increase deferral periods for payments.

In April it will consult on taking greater clawback powers on bonuses from senior staff if problems arise after they have left a firm.

The parliamentary commission on banking standards called for bank bonuses to be deferred by up to 10 years with much stronger clawback powers.

Bank of England Governor Mark Carney, FCA chief executive Martin Wheatley and Chancellor George Osborne all oppose the cap, which is supported by Labour.

In its results, published today, Barclays bonus pot increased 10 per cent despite a 32 per cent plunge in profits, a £5.8bn shareholder rights issues in June and £2bn more set aside to deal with misselling claims.

Treasury select committee chair Andrew Tyrie says: “It is concerning that the bonus cap appears to be encouraging banks to go in the wrong direction. Unless overturned in the courts it could pose a threat to the UK’s attempts to reform remuneration.”

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