FSA looks at Spain system on bank capital

By Steve Slater

LONDON (Reuters) - The financial regulator is confident it will stamp out bad practice on bank bonuses next year and is considering adopting Spain's system of forcing banks to build up bigger capital cushions during good times, a top official said on Tuesday.

"We're looking at whether a system of capital requirements can be considered that's anti-cyclical, so you build up capital during the boom and then have that available to release when times become more adverse," said Thomas Huertas, director of the banking sector at the Financial Services Authority.

That could mirror Spain's requirement for its banks to hold back more capital during strong years to position them well for any downturn.

Huertas, speaking at the Reuters Global Finance Summit in London, said the regulator should eliminate bad remuneration practice at banks next year, and concurred with criticism that some bonus structures encourage risk-taking.

"We are very confident that we have the ability either though direct supervisory dialogue or rule-making ability to eliminate bad practice (in remuneration)," Huertas said.

Bad remuneration practice "was a factor in aggravating" the current credit crisis, he said.

"We are not seeking to regulate the level of pay. We are not opposed to people earning very, very large amounts of money. We are opposed to remuneration systems that stack the deck in the favour of the executive (and) that are not consistent with sound risk management," he said.

The regulator also opposes remuneration based on short-term targets and remuneration that is paid fully in cash, he added.