PARIS (Reuters) - Europe should tread carefully in its quest to cap bankers' bonuses at no more than their annual salary as this could lead to higher basic pay, making it harder for lenders to claw back rewards and build capital, a top UK regulator said on Tuesday.
EU lawmakers, supported by Germany and France but opposed by Britain, argue that imposing caps on bankers' bonuses will prevent the sort of excessive risk taking that contributed to the financial crisis.
The danger is that banks may respond by hiking basic salaries to attract talent, said Andrew Bailey, top supervisor of banks and insurers at Britain's Financial Services Authority.
"I am sceptical ... There is a real danger that (a bonus cap) pushes up fixed costs," Bailey told an Economist conference.
"It makes it more difficult to increase retained earnings and build capital ... (and) makes it harder to actually claw back remuneration.
"I would urge caution on the issue."
Along with caps on bonuses, the EU's parliament and member states are finalising the implementation of tougher post-crisis rules on risk known as Basel III. The European Commission is also examining recommendations by a group led by Finland's top central banker to ring-fence banks' risky trading assets.
Commissioner Michel Barnier told the conference that final proposals on how to reform Europe's banks would take into account the uncertain economic recovery and individual countries' attempts to reform their banking sectors.
"We must take account of the (solution's) impact on the real economy, as well as how it fits in with structures that have already been proposed in Europe or elsewhere in the world," Barnier said.
(Reporting by Lionel Laurent; Editing by Mark Potter)