THE Bank of England has weighed in on the thorny issues of banking profitability and bonuses with a call for banks to promise lower returns to shareholders –and cut staff pay accordingly.

The bank's Financial Policy Committee believes banks have not adjusted their targets "to reflect the fact that new capital regulations should have made bank investments lower risk, but also inevitably lower return", according to the minutes of its November meeting.

The "return on equity" targets set by banks were still too high, given the regulatory environment following the financial crisis, the 11-member committee said.

The committee said the implication of lower risk and returns was lower pay and bonuses, and it proposes to inquire further into how pay is calculated and whether its link to return on equity may act as a disincentive to raising much-needed new capital. Policymakers believe there is a "strong case" for limiting staff bonuses, according to the minutes.

The FPC said sovereign and banking risks emanating from the euro area had intensified and "remain the most material and immediate threat to UK financial stability," the minutes record. In its formal recommendations last week, the FPC urged banks to bolster their capital cushions to head off the threat of a second credit crunch.

The committee is also urging more transparency on the way banks calculate risk, which determines the amount of capital they need to hold. It says the risk assessment weighting system is "opaque" both to investors and to regulators. Different banks could assign "significantly different risk weights" to identical portfolios of assets, the minutes said, suggesting some sort of "backstop" is needed to ensure a minimum level of capital against certain types of asset, as required by the new Basel rules.

But the record also shows that the FPC is concerned that the Basel rules fail to encourage lending to businesses to promote economic growth. They make no distinction, for instance, between lending to businesses and advancing capital to fund financial trading, the FPC said. "The committee recognised that this line of thinking raised some major conceptual and practical considerations... and agreed that they should return to the issue."

Adding to pressure on bankers' pay, the Association of British Insurers yesterday called on lenders to limit bonuses and overhaul how they pay staff. In a letter to all UK-listed banks, the ABI, representing 300 investing institutions, warned against a "business as usual" attitude to deciding bonuses this year.

Otto Thoresen, the former head of Aegon UK in Edinburgh and now the ABI's director general, said: "It is essential that all banks take, and are seen to take, a responsible approach."

The mounting pressure comes ahead of next February's banking results season when bankers' bonuses will be revealed.

Mr Thoresen said while each UK bank has different characteristics, ABI members believed there was a need for all banks to "fundamentally restructure their remuneration practices". He said members were concerned about the relative pain being suffered by shareholders and employees, and that maintaining capital buffers should not be funded solely by cuts to dividends.

The Government, meanwhile, has launched a consultation on extending transparency at large banks by requiring the eight highest-paid non-board executives to disclose their remuneration arrangements. Mark Hoban, financial secretary, said greater disclosure for senior executives who manage risk would help provide shareholders with "more tools to hold senior management to account".

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