By Mark Kleinman, City Editor
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 has 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, saying 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".
UK regulators have little scope to overturn or ignore the cap despite the fact that regulators and many Westminster-based politicians agree that it will be potentially counter-productive.
"There will certainly be an expression of the sentiment that the cap is likely to result in an increase in fixed costs which could expose banks to some risk when profitability is low or negative, as there would be less scope to adjust pay," said a source familiar with the PRA's thinking.
Douglas Flint, the widely-respected chairman of HSBC, has paved the way for Europe's biggest lender to increase salaries in time for the introduction of the new ceiling.
The source said the text of the consultation paper had not yet been finalised, but denied that the PRA would allow a wider array of payments, such as pension contributions, to count towards executives' base salaries when calculating the multiple allowed for bonuses. Some senior bankers say the regulator has appeared to be receptive towards that idea during recent discussions.
The British Bankers' Association has predicted that 35,000 bank employees around the world will be affected by the cap, approximately two-thirds of whom are based in the UK.
The Bank of England declined to comment ahead of the release of the consultation paper.
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