Professor John Thanassoulis said: “Barclays’ and RBS’ desire to increase bonuses when bank profits have declined will lead to a weakening of the banks’ financial stability. The increased bonus pool at Barclays alone, most of which is earmarked for investment bankers, is equivalent to 1.7 per cent of the investment bank’s Risk-Weighted Assets. To put this into perspective the global response to the financial crisis has been to increase the proportion of Risk-Weighted Assets funded by safe equity capital by a similar proportion.

“But Barclays felt they had no choice. The chairman Sir David Walker noted at the AGM that Barclays’ business was targeted aggressively by competitors, keen to poach Barclays’ best staff. RBS also said they had to pay more if they were to remain competitive.

“Barclays and RBS are both victims of a system of high pay levels which lead to financial instability as banks over-reach themselves to hire those they think can bring in extra business or generate higher returns.

“Research just published from Warwick Business School studies the aggressive poaching which is the key driver of high bankers’ pay. Professor Thanassoulis proposes that a cap on total remuneration for investment bankers in proportion to Risk-Weighted Assets applied to all banks would contribute significantly to financial stability.

“Basel III already considers pay a risk factor. Such a cap would damp down aggressive poaching and reduce bankers’ pay levels. The banks would gain in value and in safety, so this is in shareholders’ interests. And this improvement in financial security would have been worth as much as 150 basis points of extra Tier 1 capital during the last financial crisis – achieved without any risk to lending to the real economy. In fact by adjusting the cap rate during the cycle a regulator can encourage the movement of funds into retail banking and out of investment banking even further at key points of the cycle.

“The pay revolt at Barclays highlights that the unfettered system of pay competition is bad for shareholders and is bad for financial stability.”

The published research is “Bank Pay Caps, Bank Risk, and Macroprudential Regulation,” by John Thanassoulis, forthcoming in the Journal of Banking and Finance and available at http://authors.elsevier.com/sd/article/S0378426614001307 

To organise an interview, contact Ashley Potter, Press Officer, WBS, +44 (0)24 7657 3967, +44 (0)7733 013264