Big bonuses add to risk of crisis - ECB

AWARDING BANKERS big bonuses risks contributing to a future financial crisis, Jean-Claude Trichet, European Central Bank president, has warned.

Wading into the political furore over bankers’ pay, Mr Trichet said financial institutions should be using higher profits to strengthen their capital bases rather than paying out “unwarranted levels of compensation or bonuses”.

A culture of excessive financial rewards encouraged “self-referential” and “self-serving” banking.

In a speech in London, Mr Trichet warned that excessive pay could even threaten the stability of the financial system.

“I will say that the so-called bonus culture is one of the many factors that can drive the financial system in the wrong direction – away from intermediation to self-referential speculation; away from medium-term stability to short-term orientation; and away from being a service sector to being a self-serving sector.”

His comments followed the UK’s decision this week to impose a one-off supertax on bankers’ discretionary bonuses – a move quickly followed by France.

Mr Trichet reminded bankers that the ECB had provided the euro zone financial system with unlimited liquidity, “not for the banks themselves, but to enable them to finance the broader economy”.

He warned that policymakers might have reached the limit of what they could do to head off what he saw as increasingly intense financial market crises. – (Copyright The Financial Times Limited 2009)