The new chairman of the Financial Services Authority (FSA) has said it could penalise banks who pay bonuses that encourage excessive risk-taking.

Lord Adair Turner told BBC News that the FSA would not regulate how much was paid, but would ask banks to explain their bonus structures.

Banks found to encourage risky actions could be compelled to hold more capital, raising their costs.

Some believe bonuses should be based on longer-term results.

“What we are now doing is saying to banks, explain to us what your structure of bonuses are,” said Lord Turner.

“If we think they are in danger of encouraging people through that bonus structure to take risky actions which appear to look good at the time, but which create toxic assets for the future, then we have the power to say if you want to do that, you’ve got to hold a bit more capital because we think you’re a more risky institution.”

‘Back to basics’

There has been criticism that the bonus culture in the City contributed to the current financial crisis. However Lord Turner said this aspect should not be overstated.

He said other factors would be more important in ensuring there was no repeat of the credit crunch and the subsequent financial turmoil.

Lord Turner said regulators should, for example, monitor much more closely the level of liquidity in the system.

“We have to go back to basics in regulatory terms to make sure this doesn’t happen again in five or 10 years’ time,” said Lord Turner, who took over at the helm of the FSA on Saturday.

News reported by The BBC