The PRA has published a speech given by Andrew Bailey (Deputy Governor, Prudential Regulation and Chief Executive Officer, PRA) at the City Banquet.
At the start of his speech Mr Bailey covers developments in life insurance and also the capital framework for banks. In relation to the latter he discusses loss absorbency in going and gone concern states arguing that the Basel Capital framework is flawed on the basis that it did not provide adequate loss absorbency in going concern and it failed to consider what would happen in gone concern states. Mr Bailey states that the “global framework remains in that position until we can get agreement on, and implementation of, a total loss absorbency framework” and that this “is our single most important objective, at the heart of the global work of the FSB in respect of the largest banks…. The huge effort to secure what will be an historic agreement comes to the table in Brisbane next month.”
Later on in his speech Mr Bailey discusses incentives and governance. In relation to incentives he acknowledges that a lot is being said on this subject at the moment but that his view remains the same: we need a system where senior people who are responsible for the performance of their firms understand that for a reasonable period of time a meaningful proportion of their remuneration is at risk of being taken away. Mr Bailey adds that the bonus cap “is the wrong policy” and that the debate around it is misguided as it is, at times, divorced from the heart of the matter which is setting appropriate incentives by putting a meaningful amount of pay at risk. Mr Bailey refers to the Parliamentary Commission on Banking Standards which states: “There are distinct advantages to a significant proportion of banking remuneration being in variable rather than fixed form. It is easier to adjust variable remuneration to reflect the health of an individual bank. The use of variable remuneration also allows for deferral and the recouping of rewards in ways which better align remuneration with the longer term interests of a bank.”
View Andrew Bailey speech at the City Banquet, London, 16 October 2014