Carney urges bankers’ fixed pay and bonus overhaul

Mark Carney, Governor of the Bank of England, says regulations covering bankers’ fixed pay and bonuses need to be overhauled by regulators so that money can be clawed back in the event of misconduct.

The financial sector in the world’s advanced economies has undergone major reforms since the global financial crisis, including the introduction of new regulations to defer payment when banking executives are awarded bonuses.

Financial institutions have responded to these measures by raising their executive’s fixed level of pay.

In a speech in Singapore on Monday, Mr. Carney said:

“Standards may need to be developed to put non-bonus or fixed pay at risk. This will help re-build trust in financial institutions.”

Last week, five major European and North American banks were fined $4.3 billion for failing to prevent currency rigging among their traders.

Mark Carney

The new European regulations have sparked some undesirable side effects, Mr. Carney says.

Mr. Carney, who is also chairman of The Financial Stability Board, an international watchdog that monitors and makes recommendations about the global financial system, said the President of the New York Federal Reserve William Dudley’s proposal to introduce “performance bonds” for banking executives was “worthy of consideration.”

In October, Mr. Dudley suggested that banking executives’ deferred pay should be in the form of debt, and not shares. He put forward the idea that these “performance bonds” should be forfeited for penalties imposed on a financial institution for misconduct, thus taking away some of the burden on shareholders.

Mr. Carney said:

“We think that leaders and senior managers must be personally responsible for setting the cultural norms of their institutions.”

Mr. Carney explained that one of the drawbacks of the new European rule which limits bankers’ bonuses to twice their fixed income was that banks started raising fixed income. The regulation has one undesirable consequence – it limits how much may be clawed back from bonuses.

Mr. Carney said regarding the European regulations:

“European rules create a situation that makes the case for additional reforms to ensure that the burden of excessive risk taking and misconduct by staff can still be borne by those staff.”