BANKS MAY have to cut pay because they are unlikely to see again the high rate of returns they enjoyed before the financial crisis, Bank of England Deputy Governor Sir Jon Cunliffe said.
Returns on equity (RoE) for banks were 20 per cent or more in the years before the 2007-09 financial crisis but have tumbled to well below half that level for many lenders as tougher capital requirements bite.
The cost of capital is higher than RoE at many banks, a situation seen as unsustainable in the longer term.
One reason for the low returns on assets and equity is that pay has not adjusted to smaller returns, Sir Jon said.
“Banks’ pay bills have been taking a larger share of a smaller pie, relative to shareholders. That may reflect the expectation that returns in banking are set to increase in future,” he told a banking conference at Chatham House.
The BoE’s Prudential Regulation Authority supervises how much capital banks must hold.
“It is important, in seeking to restore returns, that banks and investors do not think in terms of ‘back to the future’,” Sir Jon said.
“With less leverage and more liquidity in banks, required returns ought generally to be lower than prior to the crisis.
“Trying to offset that by taking excessive risk or evading regulation will not, I think, be tolerated in the new world.”
He made no mention of the bonus element of bankers’ pay.
Sir Jon said that in the decade before the crisis started in 2007, profits attributable to shareholders averaged 60 per cent of the pay bill at global banks and 75 per cent at UK lenders. But by 2013, profits attributable to shareholders had fallen to around 25 per cent of pay bills for large global banks.
Banks are rethinking business models.