Mervyn King plunges into debate on high pay and warns banks off big bonuses

The governor of the Bank of England is the latest to join a cacophony of prominent voices outraged at City pay

Sir Mervyn King has warned that banks could damage their reputations by awarding sizeable bonuses to their executives.

Bank of England’s governor made the new appeal for fairness in bankers’ bonuses and pay packets while speaking to MPs at the Treasury Select Committee. Sir Mervyn warned against awarding big bonuses when performances had “hardly been stellar”.

Banks are currently finalising their bonus rounds for 2011 before announcing full-year results in February. Barclays boss Bob Diamond could be set to receive £10m, according to reports.

Financial institutions should look to protect themselves from the eurozone debt crisis by putting more money aside and taking measures like reducing pay, the interim Financial Policy Committee (FPC) said.

Sir Mervyn said: “We have been through a crisis where the squeeze in living standards has been unprecedented, but those affected were not responsible for the crisis.

“I think the reputation of those institutions, whose performance has hardly been stellar, will be affected by the pay of senior executives if they reward themselves with substantial compensation. If you expect a market economy to work efficiently, it has to be seen to be fair and the rewards have to be seen to be understood.”

Sir Mervyn claimed resentment about pay and bonuses would subside because there will be less need for bailouts in the future, following the move to force the banking industry to ringfence their retail and investment arms.

Taxpayers feel their money is being used to subsidise high pay for bankers, Sir Mervyn said, and so the matter is of “profound importance”.

The banks “too big to fail status” is at the centre of the problem and it allows them to borrow money at lower rates because there is a belief the taxpayer will intervene to rescue them if necessary.

“I have not heard many people complain about the returns to people in hedge funds, because they can also lose their jobs and go bust tomorrow. But everyone knows their taxes are not being used to bail them out,” said Sir Mervyn.

External FPC member Michael Cohrs has warned the eurozone debt crisis continues to pose a threat to the UK’s banks. Cohrs said the UK banks were “not in such good shape” if some of the struggling eurozone nations were to fall further into trouble.

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