The Chancellor has backed a call by the Bank of England Financial Policy Committee (FPC) for banks to cut bonuses to boost their capital buffers against financial shocks.

The FPC said in the minutes of its last meeting that, faced with short-term risks, banks should sacrifice payouts to staff and shareholders to conserve funds.

Instead of reducing loans on their balance sheets, which could starve the wider economy of credit, they should build up their capital reserves, possibly by tapping shareholders, the FPC added.

George Osborne told Parliament that banks "should be using any earnings they have to strengthen their balance sheets if necessary, rather than distribute those earnings in larger bonuses. We need stronger banks, not larger bonuses this winter ... I would expect the banking system to follow that advice."


The demands from the FPC and the Chancellor pile further pressure on Britain's banks ahead of a fraught end-of-year bonus round.

Grim economic conditions have cut profit estimates for the banks and big payouts to top bankers will be seen as a kick in the face to people suffering falling general living standards.

Adding to the siege on the banks, the Association of British Insurers this week demanded the banks cut bonuses instead of reducing dividends.

The FPC's demands came as the bank announced a new scheme to make funding available to banks if the market for short-term sterling liquidity dries up.

Under the contingency plans, banks would be able to bid for funds by putting up top-quality assets as collateral.

The bank's announcements demonstrate its fears that trouble is in store for Britain's banking system as the eurozone crisis and the weakening economy threaten a new wave of upheaval.

The committee also cast doubt on banks' financial targets and the calculations they make to judge the riskiness of their lending.

The minutes said targets for shareholder returns did not take into account that "new capital regulations should have made bank investments lower risk but also inevitably lower return".

The subject will get a full airing at a future FPC meeting.

A further recommendation was for banks to publish "leverage ratios" in the next year showing a simple ratio of capital as a percentage of total loans. The committee said the banks' measure of "risk-adjusted assets" was difficult for investors to understand.

- Independent