Britain can free its banking system from the burden of excessive EU red tape after Brexit – and can instead focus on the important rules which keep the financial system safe, Mark Carney, the Bank of England’s Governor, indicated yesterday.
That could include the bonus cap which the Bank of England has long opposed, as well as rules which force small banks to face the same rules as global institutions.
Speaking at the FICC Market Standards Board’s event on the topic of fair and effective markets, the Governor said that regulation in general should be more proportionate.
“There are areas we would make changes, but within the context of maintaining the overall levels of resilience,” Mr Carney said.
The Governor stressed that it was important to keep high regulatory standards because Britain’s financial sector could grow to 15 to 20 times gross domestic product in the next couple of decades, up from about 10 times at present. He also discussed the importance of replacing Libor – the interest rate benchmark which was tainted by manipulation and abuse by traders – with Sonia, a different overnight sterling rate.
The Bank of England believes the bonus cap has damaging effects for bank stability and incentives
In the past Mr Carney has criticised Brussels’s bonus cap, which limits bankers’ variable pay to the same level as their salaries, or double the salary if shareholders agree. In one report the Bank of England said this pushes up salaries, making banks’ finances less flexible.
“One consequence of the regulation of remuneration, particularly the introduction in the EU of the bonus cap, has been an increase in fixed remuneration as a proportion of total remuneration,” the Bank of England said in December 2015. “As with excessive variable remuneration without appropriate incentives, this can also impact negatively on resilience within the financial system by limiting the proportion of total remuneration that can be used to absorb losses in a downturn and that which is aligned to long-term risks.”
Officials have tried to make bonuses an incentive for good long-term behaviour, by paying them out over several years and clawing them back if bankers misbehave.
By pushing more money into salaries, the Bank of England fears the cap prevents this from working
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