Curbs on bankers' pay won't cut risk: IMF
CAPPING bankers' bonuses will not reduce risk in the financial system, the International Monetary Fund said on Wednesday, offering Britain moral support in its legal challenge to the European Union curbs on financial sector pay.
In its latest Global Financial Stability Report, the IMF looked at pay in the banking sector, saying that excessive risk taken by lenders contributed to the global financial crisis.
Reforms have sought to foster more prudent behaviour by banks, including how pay packets are structured. Measures include deferring parts of a bonus for several years and the ability to claw back awards if misconduct is uncovered.
The EU has gone further, capping banker bonuses at twice the fixed salary, prompting some banks to bump up fixed pay by giving "allowances" to key staff.
"The imposition of overall caps...should not be expected to reduce risk-taking, given that no evidence was found that more fixed pay correlates with less risk in large banks," the IMF report said.
"The analysis shows that, in theory, a cap on variable pay may actually increase the incentive for managers to take on risk at the expense of shareholders and debt holders. Therefore, measures aimed at reducing the share of variable compensation should be subject to additional study," the IMF said.
Britain is challenging the EU cap in the bloc's top court, saying it increases risks by forcing banks to top up fixed pay, making them less nimble in cutting costs in troubled markets.
The IMF did find, however, that more pay tied to longer-term equity performance is related to less risk taking, provided banks are not distressed.