Bankers' bonus rules have led to higher fixed salaries, making losses difficult to absorb in event of a downtown, warns Bank of England

Hayley Kirton
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Regulations surrounding bankers' pay, particularly the EU bonus cap, have led to fixed salaries representing a higher proportion of total pay packets, meaning financial institutions are less capable of reacting to a downturn, the Bank of England has warned today.

In its fourth quarterly bulletin for 2015, the Bank of England pointed out that not being able to vary workers' remuneration when business was looking bleak could have a negative impact on the resilience of the financial system as firms are restricted in the ways they can absorb losses.

The Bank highlighted that, as far as the ability to react quickly to changes in financial circumstances was concerned, higher rates of fixed salaries carried similar risks to bonuses that were awarded without appropriate incentivisation.

The bulletin noted that "close alignment between risk and reward, including the use of variable remuneration, can contribute to the safety and soundness of firms and the stability of the financial system". It also noted the need for a chunk of remuneration to be variable and at risk of being eliminated or reduced, if circumstances required it to be.

Commenting on the findings, a British Bankers' Association spokesperson said:

Variable pay also provides flexibility in the cost base making banks more financially secure. As the Bank of England highlights, any approach which increases fixed costs and reduces the ability to use these tools is counterproductive.

Following the financial crisis, a raft of regulation was introduced to curb bankers' bonuses, with the hopes that it would discourage unbridled risk taking. These included the requirement for awards above a certain threshold to be paid at least 50 per cent in non-cash instruments, with the goal of binding bonuses to the longer term performance of the firm.

In 2016, further rules will be introduced, which will apply deferral periods of up to seven years from the date of award.