New banking supervisor talks tough

Canary Wharf
Image caption Banks are facing tougher regulation following the financial crisis

A senior Bank of England official has told the BBC that he will be "extremely sceptical" about bankers receiving large bonuses.

Andrew Bailey is to be the deputy chief executive of the new Prudential Regulation Authority (PRA) which will be responsible for banking supervision.

The new body will replace the Financial Services Authority.

The PRA is suspicious of large bonuses for bankers as large pay-outs often accompany unacceptable risk-taking.

According to Mr Bailey: "You have to be extremely sceptical as a starting point, and say you had better be able to justify these things very well to us."

In an interview for BBC Radio 4's PM programme, he was asked if he accepted that many banks had spent much of the last decade trying to pull the wool over the eyes of regulators.

"I do accept that," said Mr Bailey, who is the current chief cashier of the Bank of England.

"And the lesson from the last three years is that it must stop."

'Greater judgement'

Part of the problem in the run-up to the financial crisis that erupted in America during 2007 was what many bankers call "gaming the regulator" - that is, operating within the letter of banking regulations while keeping officials in the dark about what was really happening.

The PRA will insist that banks keep to the spirit of regulation.

"There is going to be a greater element of judgement in the use of authority," according to Mr Bailey. "It is about stopping gaming. It's saying, 'this is not acceptable'."

So would the regulators remove the chief executive of a bank which persistently tried to find clever ways around the rules?

"If that's what it took, that is what we would do," said Mr Bailey.

The problem with this kind of tough approach to regulation is that banking is a global business and banks like to hint that they will go elsewhere if they dislike the rules in one country.

Andrew Bailey's response is robust.

"This whole issue that we can't do this because other countries won't, has been around for as long as I've been involved in the industry - and that's 25 years.

"On a lot of occasions you have to say, 'I am sorry I am not going to back off because you say you might go somewhere else'. There may be occasions where you call people's bluff."

Big bonuses

He also draws attention to the attempts by the G20 group of the world's most powerful economies to co-ordinate bank reform.

This has had some success in insisting that bankers' bonuses are paid out of over a number of years and can be clawed back if deals subsequently turn sour.

But the G20 agreement did not attempt to tackle the sheer size of bonuses - money which could be used to help rebuild banks' balance sheets and bolster their lending. And investment banks have continued to create multi-billion pound bonus pools for employees.

It is also worth pointing out that the new PRA will not be starting work anytime soon - it is unlikely to be up and running until 2012.

Its chief executive will be Hector Sants, who will move across from running the Financial Services Authority (FSA), which the PRA will partially replace.

The new organisation will form part of the Bank of England, and Andrew Bailey will bring 25 years of Bank experience to the job. Much of the rest of the staff is likely to come from the FSA.

Both Mr Sants and Mr Bailey have talked about the need for a tough approach to regulation.

Taxpayers who have bailed out the banking system after its recent crisis will want to see tough action as well as tough talk.

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