(Adds more detail from speech)
By Huw Jones
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.
Returns on equity (RoE) for banks were 20 percent or more in the years before the 2007-09 financial crisis but have tumbled to well below half that level for many lenders as tougher capital requirements bite.
The cost of capital is higher than ROE at many banks, a situation seen as unsustainable in the longer term. One reason for the low returns on assets and equity is that pay 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.
He made no mention of the bonus element of bankers’ pay.
Cunliffe said that in the decade before the crisis started in 2007, profits attributable to shareholders averaged 60 percent of the pay bill at global banks and 75 percent at UK lenders. But by 2013, profits attributable to shareholders had fallen to around 25 percent of pay bills for large global banks.
RoEs at UK banks would have been nearly 6 percentage points higher last year if the ratio of staff costs to the sum of staff costs and shareholders’ profit had been at its 2000-07 average, Cunliffe added.
Banks are rethinking business models, such as reining back on their fixed income, commodities and currency activities in order to lessen the need for capital under new rules.
“It is not yet clear how this very material element of banks’ business models will evolve,” Cunliffe said.
But such changes should see fewer high earners at banks, helping to restore ROE levels and reduce the overall pay bill, he added. (Editing by Catherine Evans)