Bankers’ bonuses should be deferred for as long as 10 years to hold executives accountable for risks, said Robert Jenkins, a member of a Bank of England committee charged with ensuring financial stability.
“Five years might or might not be appropriate for some categories of risk, but if we are going to rely on remuneration as a key driver of financial stability then it should probably be between five or ten years,” Jenkins said in an interview yesterday in Washington. “Ten years would capture the majority of risk cycles and therefore the gains and losses that came from any risk that was taken today.”
Jenkins’ comments echo those of Andrew Haldane, another member of the BOE’s Financial Policy Committee, and signal U.K. regulators may continue to push banks to reduce risks. The central bank, which is adding regulatory powers to its monetary-policy remit, said in November banks may need to raise more capital to cover loan losses and that they may have overstated their capital strength.
The problem “is that very large sums of money can be given to risk takers as a reward for the apparent profitability on the risks that they take before the risks have matured and before anyone knows for sure that it was profitable,” said Jenkins, who was in Washington to attend a conference at the George Washington University Law School.
The FPC has been set up to use macroprudential tools to ensure the resilience of Britain’s financial system, part of a reshaping of regulation by the government.
It proposed powers last month to allow it to alter the amount of capital banks hold against real-estate assets as well as derivatives and bonds. While the panel will seek to act at the “highest level,” it also sees a potential need to target capital at a “more granular level,” it said in a draft paper on Jan. 14. “Such an approach might help to tackle threats to stability before they spread, particularly by leaning against exuberance in specific subsectors.”
European regulators agreed on tougher bonus rules in 2011, including minimum three-year deferrals, blaming large cash payouts for encouraging the type of risk-taking that led to the collapse of Lehman Brothers Holdings Inc. and the subsequent financial crisis. Haldane, who is also the BOE’s executive director for financial stability, told U.K. lawmakers last month that while progress has been made on remuneration codes, more is needed.
“For my money, they still fall somewhat short of the standards of prudence I would wish to see embedded,” he said.
Banks are already cutting pay and increasing deferrals as investors demand higher returns.
Deutsche Bank AG’s bonus pool for 2012 will be 11 percent smaller than the previous year, it said last month. Barclays Plc will cap cash bonuses at 65,000 pounds ($103,000) for staff at its investment bank and defer awards for senior managers, according to a person with knowledge of the plans. The deferral will see 2012 bonuses paid in one-third installments from 2014 to 2016, half in cash and half in stock.
Jenkins, who previously worked at Credit Suisse Group AG and F&C Asset Management Plc, also called for higher capital requirements and said “too-big-to-fail, too-big-to-bail and too-big-to-jail” institutions remain a challenge for regulation.
“Higher capital requirements and less leverage need not be incompatible with economic growth and higher capital requirements and lower leverage can be compatible with shareholder value,” he said. But it “cannot be compatible with both of those and prior levels of banking compensation.”
The Financial Policy Committee is led by BOE Governor Mervyn King and makes recommendations on areas of financial policy such as capital and liquidity. It is currently operating on an interim basis as legislation passes through the U.K. Parliament.