LONDON, Oct 20 (Reuters) - Banks may have to cut pay because they are unlikely to see again the high rate of returns they enjoyed before the financial crisis, Bank of England Deputy Governor Jon Cunliffe said on Monday.
Banks saw returns on equity (RoE) of 20 percent or more in before the 2007-09 financial crisis. But they have now tumbled to well below half that level at many as tougher capital requirements bite.
The cost of capital is higher than ROEs at many lenders, a situation seen as unsustainble in the longer term. One reason for the low returns on assets and equity is that pay at banks has not adjusted to smaller returns, Cunliffe said.
“Banks’ pay bills have been taking a larger share of a smaller pie, relative to shareholders. That may reflect the expectation that returns in banking are set to increase in future,” Cunliffe told a banking conference at Chatham House.
The BoE’s Prudential Regulation Authority supervises how much capital banks must hold.
“It is important, in seeking to restore returns, that banks and investors do not think in terms of ‘back to the future’,” Cunliffe said.
“With less leverage and more liquidity in banks, required returns ought generally to be lower than prior to the crisis. Trying to offset that by taking excessive risk or evading regulation will not, I think, be tolerated in the new world,” Cunliffe added. (Reporting by Huw Jones; Editing by Larry King)