Banks Should Defer Bonuses for 10 Years, BOE’s Haldane Says

Banks should defer bonus payouts for staff for as long as 10 years to improve “prudence” in remuneration, said Andrew Haldane, executive director for financial stability at the Bank of England.

The current window is “far too short to capture the cycle in credit” and a period of five to 10 years would be better, Haldane said at a hearing of the Parliamentary Commission on Banking Standards in London today. “We had roughly a 20-year boom in the run-up to this crisis, so measuring performance only over a three or five-year window is far too short.”

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 2008 collapse of Lehman Brothers Holdings Inc. and the subsequent financial crisis. Haldane, who is also a member of the Bank of England’s Financial Policy Committee, said there’s a case to lengthen that deferral period further.

“Progress has been made on remuneration codes internationally and domestically over the last three or four years,” he said. “But for my money, they still fall somewhat short of the standards of prudence I would wish to see embedded.”

Pay Cuts

Other FPC members have also raised the issue of risk-free bonus payments before the financial crisis.

“The returns may come short-term but the risks come later,” Robert Jenkins, a member of the Bank of England’s Financial Policy Committee, said in a comment posted on the central bank’s website last week. “Many bankers collected the windfalls short-term and the shareholders collected the fallout medium-term.”

Banks are already cutting pay and increasing deferrals as investors demand higher returns.

Deutsche Bank AG is weighing 2012 bonus cuts of as much as 20 percent for investment bankers in Europe, four people briefed on the matter said last week. The Frankfurt-based lender is also increasing the vesting period for deferred bonuses for about 150 senior managers to five years from three, and will make a single payout after the deferral period ends rather than staggered payments each year.

Haldane praised the pay model at HSBC Holdings Plc, the U.K.’s largest bank, where employees “are locked in until retirement or resignation.”

“It gets you as close as you possibly can get to the old partnership and limited liability model, where you are on the hook up until the point you walk out the door,” Haldane said.

Before it's here, it's on the Bloomberg Terminal.