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UK and European rules enacted after the 2008 crisis require banks to defer large payouts for three to five years and link the amounts to the riskiness of the activities involved. But Mr Haldane told a panel of the Banking Standards Commission that tougher standards were required.
“Three to five years is far too short to capture the cycle in credit. We had roughly a 20-year boom in the run-up to this crisis, so measuring performance only over a three- or five-year window is far too short”, he told the body, which is charged with finding ways to improve the culture of UK banking.
Mr Haldane also called for measuring success through the returns on assets, rather than returns on equity because the latter yardstick encourages banks to load up on debt, which in turn makes them vulnerable to unexpected losses.
He also suggested that the commission should consider requiring banks to pay executives in bank bonds or convertible debt, rather than pure equity and cash.
Regulators would pick a business line at random and do a thorough check to see whether the products are being sold to the right people or held and traded for the right reasons. If the asset class fails, senior management would face sanctions, Mr Haldane explained.
Mr Haldane, who is known as the Bank of England’s free thinker, reeled off a long series of proposals for the banking commission to consider. Among them were creating special accounting rules for banks and removing the tax advantages of debt over equity for financial institutions.
An open critic of the complex Basel III bank safety rules, he echoed calls from the Financial Policy Committee, the UK’s new stability regulator, for tougher restrictions on overall bank borrowing, known as leverage. The Basel rules call for banks to hold top-quality capital equal to 3 per cent of their total balance sheets, but FPC members Michael Cohrs and Robert Jenkins said last week that 4 per cent would be better.
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