Banks seek pay curbs to stop traders from taking risks

Leading bankers are preparing the groundwork for a common standard for pay awards in the City, as a way of preventing traders from taking too many risks as they chase substantial annual bonuses.

The bankers plan to hold a formal meeting around Christmas, a move prompted by mounting concern in the City about the way - and the amounts - traders are paid.

The main fear is that these annual bonuses, which can double or even triple already substantial salaries, could encourage traders to take on too much risk and threaten the stability of their firms as in the high- profile collapse of Barings last year.

"It could be argued that some traders are paid to take on more risk because it generates a lot of revenues," said Peter Vipond, assistant director of the British Bankers Association, which is organising the symposium.

The bankers' aim is to foster debate on the sensitive issue and one of the goals could be to encourage reward systems based on the risks taken by traders, often the youngest and highest-paid members of a banking team, as well as the revenues they generate.

"A trader making half-a-million dollars taking no risk is doing more good than a trader who made million but bet the bank," Mr Vipond said.

Regulators pay close attention to the basis on which City traders are rewarded, but have no plans to introduce draconian rules on remuneration. And any such moves would be strongly resisted by the industry on the grounds of commercial interference by the banking and securities regulators - the Bank of England and the Securities and Futures Authority.

Pay deals are highly competitive in the City and are often used by firms to poach staff from competitors. This caused controversy earlier this year when ING Barings hit out against rival Deutsche Morgan Grenfell after it poached a trading team, saying such action pushed up pay deals unduly. Generally, banks go to great length to monitor risks taken by their traders and take a tougher stance than is required by regulators.

The eventual conclusion of the discussions among banks could lead to a reappraisal of pay deals and a consensus over bonuses being averaged out over a period of years or paid a year behind, for instance.

The Bank of England takes account of banks' pay schemes to watch for incentive schemes which encourage too much risk.