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

The global financial crisis is set to get worse, with a large US bank likely to collapse in the next few months, a former IMF chief economist has warned.

Kenneth Rogoff’s comments came as shares in Fannie Mae and Freddie Mac sank on a report that the home lenders would, in effect, be nationalised.

Despite hopes that the US economy had turned the corner, Mr Rogoff claimed it was “not out of the woods”.

“I would even go further to say ‘the worst is to come’,” he said.

“We’re not just going to see mid-sized banks go under in the next few months,” said Mr Rogoff, who held the IMF role between 2001 and 2004.

“We’re going to see a whopper, we’re going to see a big one, one of the big investment banks or big banks.”

“We have to see more consolidation in the financial sector before this is over” Kenneth Rogoff

Speaking at a conference in Singapore, Mr Rogoff, now an economics professor at Harvard, forecast that Fannie Mae and Freddie Mac would “probably” not exist in their present form in a few years.

“We have to see more consolidation in the financial sector before this is over.”

On Monday, shares of Fannie Mae fell more than 22%, or $1.76, to close at $6.15. Shares of Freddie Mac fell almost 25%, or $1.46, to $4.39.

‘Wrong move’

Shares in Freddie and Fannie first fell sharply last month on fears that they would run out of money to fund their business, forcing the US government to take radical steps to ease the panic.

The two firms are the backbone of the US mortgage market as almost all US lenders rely on them to buy their mortgages in order to access the funds to lend to consumers.

As mortgage guarantors, they must pay out when homeowners default on their loans.

With the housing market across the US crumbling, their finances have come under severe stress.

Problems in the US housing sector prompted the Federal Reserve to slash interest rates to 2% earlier this year.

But Mr Rogoff said the Fed was wrong to cut interest rates as “dramatically” as it did.

“Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States,” he added.

News reported by The BBC