By Huw Jones
LONDON, Sept 22 (Reuters) - The G20 summit will be asked to back restraints on bonuses this week so that banks meet higher capital requirements and keep lending, but tougher curbs may still come later, Britain's financial regulator said on Tuesday.
The G20's regulation coordination arm, the Financial Stability Board, will ask the G20 in the U.S. city of Pittsburgh on Thursday and Friday to back its guidelines on how banks must structure pay packages to avoid encouraging risky behaviour by traders that undermines a bank's stability.
The FSB will state "it is essential that priority use of high profits should be to rebuild the capital needed to support lending, allow official measures to be removed, prepare institutions to meet higher capital requirements, and that bonus and dividend policies should be consistent with this priority," UK Financial Services Authority Chairman, Adair Turner, told bankers in the heart of Britain's ancient financial district.
Big bonuses have angered a public facing rising unemployment and cuts in public services as governments make savings to pay for shoring up troubled banks.
"And over the long term there will be a legitimate interest of regulators in aggregate bonus payment rates if and when these payments have implications for capital conservation," Turner said.
Curbing bonuses is seen as one of the G20's main headline grabbers and a deal is expected after France backed down from calls for limits on individual bonuses. The FSB guidelines aim to reduce bonuses indirectly by influencing the amount of cash available to make payments.
The importance of bonus structures in the origins of the worst financial crisis in 70 years was much less important than "huge failures" in capital adequacy and liquidity regulation, Turner said.
HERETIC
The banking system is stable but it cannot be a return to "business as usual" after its "near death" experience last September when Lehman Brothers bank collapsed, Turner said.
Turner took up the reins as top regulator of Europe's biggest banking centre just days after Lehman's demise and faces heavy pressure to act tough. The UK opposition Conservative Party, tipped in opinion polls to win the next election, has promised to abolish the FSA.
Last month he was castigated by financial sector officials for saying some financial products were "socially useless".
Turner appeared to relish his "heretic" image on Tuesday, saying bits of the financial system can get too big and it would be better for society if they got smaller.
Banks need to be willing, like the regulator, to recognise that there are some profitable activities so unlikely to have a social benefit, direct or indirect, that they should voluntarily walk away from them, Turner said.
"They need to accept the capital and other requirements which will be imposed on activities of little value and considerable risk, rather than deploy lobbying power to argue against such constraints on the basis of a simplistic assertion that all innovation is always valuable," Turner said.
Banks should focus on core functions to provide savings, credit and payment to people and companies to regain trust.
While trading foreign exchange, government bonds and shares were relatively low risk, if volumes and in riskier sectors shrink due to heavier regulation "that too, we should not regret", Turner said.
(Reporting by Huw Jones, editing by Ron Askew)