The controversial European Union cap for bankers' bonuses is an unhelpful "distraction", according to the UK's top financial sector regulators.
Giving evidence to the Banking Standards Commission yesterday, Sir Mervyn King said that the move by Brussels "will neither be as beneficial as proponents hope, nor will it be as damaging as opponents fear".
Sir Mervyn added that capping bonuses was "a bit of a distraction" in that it only addressed the symptoms of excessive pay for bankers rather than the underlying cause, which he identified as the implicit subsidy enjoyed by banks that are too big to fail.
Andrew Bailey, the incoming head of the Prudential Regulatory Authority, also giving evidence, said banks were likely to respond to the cap by raising fixed salaries and that this could interfere with regulators' efforts to ensure that bonuses can be clawed back.
"It looks hard, but it runs the risk that it will push up fixed remuneration," he said. "Fixed remuneration is essentially cash out the door."
On the subject of too big to fail, Sir Mervyn said the Vickers Commission should be reconstituted in five years' time to report on whether its ring-fencing reforms have succeeding in making the banking system safer and whether the new regulatory regime was working effectively.
He said: "My own personal view is that it would be sensible to have a proper review after four or five years, not just of the ring-fence, but of a whole range of issues that I would put under the umbrella heading: Has the United Kingdom solved the too-big-to-fail problem?"
The Governor reiterated his call for the Chancellor to implement the original 4 per cent leverage ratio recommended by Vickers, rather than the more lenient 3 per cent ratio the Chancellor, George Osborne, put into the Financial Services Bill after lobbying by banks.
Sir Mervyn noted that bank executives' remuneration rewards tended to be tied to higher returns on equity, which are easier to achieve with higher leverage. "I suspect that is the driving force on the lobbying on leverage," he said.
Sir Mervyn said lobbying by banks was still shaping ministers' decisions on legislation. Speaking of the Labour years, he said: "I was surprised at the degree of access of bank executives to people at the very top – certainly much better than regulators". He added: "The climate has changed since then – but the access hasn't."