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By Huw Jones
LONDON, Oct 20 (Reuters) - Banks may have to cut pay becausethey are unlikely to see again the high rate of returns theyenjoyed before the financial crisis, Bank of England DeputyGovernor Jon Cunliffe said on Monday.
Returns on equity (RoE) for banks were 20 percent or more inthe years before the 2007-09 financial crisis but have tumbledto well below half that level for many lenders as toughercapital requirements bite.
The cost of capital is higher than ROE at many banks, asituation seen as unsustainable in the longer term. One reasonfor the low returns on assets and equity is that pay has notadjusted to smaller returns, Cunliffe said.
"Banks' pay bills have been taking a larger share of asmaller pie, relative to shareholders. That may reflect theexpectation that returns in banking are set to increase infuture," Cunliffe told a banking conference at Chatham House.
The BoE's Prudential Regulation Authority supervises howmuch capital banks must hold.
"It is important, in seeking to restore returns, that banksand investors do not think in terms of 'back to the future',"Cunliffe said.
"With less leverage and more liquidity in banks, requiredreturns ought generally to be lower than prior to the crisis.Trying to offset that by taking excessive risk or evadingregulation 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 startedin 2007, profits attributable to shareholders averaged 60percent of the pay bill at global banks and 75 percent at UKlenders. But by 2013, profits attributable to shareholders hadfallen to around 25 percent of pay bills for large global banks.
RoEs at UK banks would have been nearly 6 percentage pointshigher last year if the ratio of staff costs to the sum of staffcosts and shareholders' profit had been at its 2000-07 average,Cunliffe added.
Banks are rethinking business models, such as reining backon their fixed income, commodities and currency activities inorder to lessen the need for capital under new rules.
"It is not yet clear how this very material element ofbanks' 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)
