Banks in talks over the size of bonus pots

The British Bankers' Association said it was talking to the Government about issues linked to executive pay and the banking industry's responsibilities to society.

The statement followed a report that some of Britain's biggest banks were involved in behind-the-scenes talks over a joint plan to cut bonus payouts and boost lending to small businesses.

The discussions come as pressure mounts from politicians and business leaders to lower the pooled bonus pot ahead of January's bonus round.

Business Secretary Vince Cable recently called for "restraint" from banks when determining remuneration.

Angela Knight, the chief executive of the British Bankers' Association, said: "We have said repeatedly that the banks understand the public mood with respect to remuneration and the banks also understand their societal responsibilities.

"It is not surprising, therefore, that we are talking with the Government on these and a range of other issues.

"Given the emphasis the Spending Review has put on the private sector leading an economic recovery, the banks are aware of the role that they must play."

A BBA spokesman declined to name the banks involved in the talks.

A report in The Times said several banks were looking at reducing the overall level of bonus payments, but were resisting the idea of an absolute cap on individual bonuses, as this would leave them at a disadvantage to their overseas rivals.

Bankers' pay packets are continuing to recover to pre-credit crunch levels.

A study by the Centre for Economics and Business Research (CEBR) – which took into account all City workers including fund managers and staff working with equities and bonds – forecast that the total bonus pot would hit 7bn this year alone.

The banks are also believed to be looking at increasing lending to small businesses, which could involve a pledge to commit a fixed total amount to small business lending next year. Earlier in the year, bosses of UK banks, co-ordinated by the BBA, unveiled plans for a 1.5bn growth fund for small businesses.

Under EU rules, senior managers in financial firms operating across Europe must defer up to 60 per cent of their bonuses for three to five years. Half of all bonuses need to be paid in shares, rather than cash.

The UK has adopted the EU rules, but has gone further by permanently retaining last year's bonus tax.

A spokesman for Standard Chartered bank said it was not part of any "pact" that was discussing issues related to the banking sec-tor.

The spokesman added: "We operate the vast majority of our business in the fast-growing markets of Asia, Africa and the Middle East.

"Standard Chartered itself did not require any public, or private, assistance during, or after the crisis.

"At the full year results we reported seven years of record income and profit.

"We fully understand the public's concern over compensation for banks competing in the UK.

"We fully support the FSA codes on bonus and compensation arrangements, and have implemented these for all our staff globally, even though 97 per cent do not sit in the UK."

A Royal Bank of Scotland spokesman said: "We're not saying anything new on the matter only to remind (you) that both our chairman and chief executive have already said publicly that, if investment bank bonuses are down, so will performance related pay be."

It was also reported yesterday that Eric Daniels, the chief executive of Lloyds Banking Group, had called on the Government to honour what he described as a pledge by its predecessor not to unwind the bank's takeover of rival HBOS.

Mr Daniels told the Financial Times: "One of the things that characterises most modern governments is that when you make an agreement with the state, it's an agreement with the state, independent of which political party is in power.

"There was a sentiment (then) that financial stability was more important and that the issue of competition took second place. As a result of that, the secretary of state signed off the deal."

Last week, Clare Spottiswoode, a member of the Independent Commission on Banking (ICB), led a public debate on the role of UK banking at Leeds University, to give people the opportunity to contribute to its formulation of recommendations to the Government.

She said: "It's a difficult industry (banking) because things aren't simple.

"There needs to be effective competition where we deal with the barriers to entry for smaller institutions."

Governor 'crossed line'

Bank of England Governor Mervyn King crossed the line by endorsing the Government's austerity plan shortly after the May election, Monetary Policy Committee member Adam Posen said yesterday.

Mr Posen said at least two policymakers felt Mr King's comments in May and lines in the May Inflation Report were "excessively political".

Mr King, who along with Mr Posen and other MPC members was giving testimony to a parliamentary committee, strongly defended his actions.

He said: "The Inflation Report appeared after the election and I commented as governor. I have never spoken ever about the balance between spending and taxes, let alone about any of the individual measures."