A cap on bank bonuses being introduced at Brussels' behest would drive up fixed costs and expose lenders to greater risk of instability, the Bank of England will warn next month.
Sky News reports that they have learnt that the Prudential Regulation Authority (PRA), the new watchdog responsible for the stability of the banking system, will issue the warning in a consultation paper on financial sector remuneration due to be published in the coming weeks.
It will pit UK regulators firmly against European Commission plans to limit bonuses for bankers and traders to – at most – two times their base salaries, which are expected to be introduced either next year or in 2015.
British-based lenders have argued against the cap, arguing that they will have little choice but to inflate basic pay if they are to compete with rivals unaffected by the new restrictions.
Andrew Bailey, the PRA’s chief executive, echoed their opposition at a Treasury Select Committee hearing earlier this year. He said that the cap would 'reduce the discipline in the system but it won’t reduce overall remuneration' and warned that it 'will institute an unhelpful culture of banks spending their time finding ways to get around the rules'.
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