Mr. Ed Sibley:

Before I speak about pay, I would like to add a little colour to the Governor's remarks. Like many people within the banks, I am personally driven by ensuring that there is no recurrence of the pain and human costs associated with what happened here before. The environment we are now operating in is fundamentally different, certainly from a regulatory and supervisory perspective. The international and domestic regulatory framework is fundamentally changed. The philosophy underpinning our approach to supervision has fundamentally changed. There has been a fundamental shift in the requirements around the levels of capital the banks have to hold, how the banks must fund themselves and how we can move towards being able to resolve difficulties without recourse to the taxpayer. Our expectations around governance, risk management and control have all changed. A great deal of work has been done internationally and domestically to address the failings that led up to the crisis.

Specifically on the point of pay, which was raised by the Chairman on the previous occasion when he was not entirely happy with our somewhat nuanced response, I do not see a case for raising the cap in the domestic retail banks. That is a matter for their shareholders. Clearly, different candidates will be available to operate in those roles at a higher salary level but it is perfectly plausible to find people to work in those roles within the salary cap. Where there is a case for thinking carefully is regarding what is happening underneath those levels and the level of remuneration for some of the critical functions in roles subject to the cap where the banks are competing against firms not subject to it. They are potentially at risk of losing critical staff in risk management, analysts and those who deal with customers. There is merit in looking at elements of variable pay in these circumstances, subject to it being well designed, making sure the incentives are aligned with the culture stated within the institution and being consistent with the rules now in place on having clawbacks where people are overly short term in their thinking and risks are not being managed. There is a case for thinking in these terms. It would also allow firms and banks to vary their costs according to their circumstances. If they head into a downturn with a high fixed salary cost, the options available to cut back costs are different to those with a more variable element. There is a case for looking at variable pay but not at the top level. It is much more with regard to the people working in the institutions. It would have to be well designed, consistent with the rules and all we are doing on the culture in institutions.