Overpaid City whiz-kids squeezed after pounds 50m loss

The "bonus culture" of the City of London, where young traders reap high rewards for taking high risks, will come under attack from the Bank of England this week in the aftermath of the latest financial scandal.

As an inquiry gets under way into a pounds 50m "black hole" found in the accounts of NatWest's investment banking arm, NatWest Markets, senior Bank of England official Daniel Davis will hit out at high bonus levels for dealers in an article to be published tomorrow.

The loss is believed to have been incurred in the risky and complex derivatives market, where the "rogue trader" Nick Leeson brought down Barings. A senior NatWest trader, Neil Dodgeson, is understood to have been suspended, while the inquiry is focusing on a junior trader he supervised, Kyriacous Papouis, who resigned from the bank at Christmas and now works for the US broking firm Bear Stearns.

In the wake of the losses, it emerged yesterday, future bonuses for NatWest Markets staff will be slashed. Senior executives may lose the big rewards - from pounds 100,000 to over pounds 1m - they can achieve over a three-year period.

Mr Davis attacks the whole culture of bonuses in his article in Financial Stability Review, published tomorrow. Since many City traders receive a significant part of their income as bonuses, he writes, they have a personal stake in a bank's profits. "If these employees have significant discretion, then a firm's overall risk may be influenced by its employees' attitudes to risk."

The Bank has been privately critical of City salaries since the Barings fiasco, and its warning comes only three days after the discovery that Sir David Walker, managing director of Morgan Stanley's European operation, was paid pounds 4m last year, twice as much as in 1995.

Sir David may well be the highest-paid banker in London, but a bumper year in 1996 has meant that City bonuses are higher than ever before - with perhaps as many as 1,000 salaries of more than $1m (pounds 625,000).

Although this bonus bonanza occurs within sight of the general election, it is not likely to become a political issue. Alistair Darling, Labour's spokesman on City business, said yesterday: "It's a matter for the banks' management."

NatWest's preliminary investigation suggests that Mr Papouis, earning pounds 80,000 a year, made losses that could not have been reasonably picked up earlier by staff at NatWest Markets. Although Mr Dodgeson has been suspended, it is not thought likely that there will be a ritual cull of executives.

Instead, the bank is keen to make staff aware of their collective responsibility for sharper supervision of trading. The pounds 50m loss will therefore be allocated across all bonus schemes, with the cost being weighted most heavily towards those most closely involved with the interest rate options business.

Bonuses at Deutsche Morgan Grenfell have also been cut as a direct result of the bizarre trading schemes employed by Peter Young, whose losses amounted to pounds 400m. These are the first examples of the pain of reduced bonuses being shared by a whole bank division.

At this stage NatWest does not believe its losses were related to personal gain. Mr Papouis left the bank before collecting his 1996 bonus.