City watchdog attacks 'big bonus culture' which encourages bankers to take huge risks

Financial Services Authority chief Hector Sants says the "smash and grab" approach is damaging the stability of the market.

Instead, the regulator will encourage banks to take a more responsible attitude and to take into account the long-term consequences of a deal.

The FSA is the lead agency that regulates financial services companies, including banks, pension funds and insurance companies.

On the brink: Northern Rock's loan from the Bank of England must be paid back in full by 2010

Its focus on this area of huge bonuses is a significant development and is seen as a warning shot over the bows of some of the world's biggest institutions.

It was the lure of a fat bonus that was said to have been behind the £3.7billion rogue trade at French bank Societe Generale by employee Jerome Kerviel.

In March, Credit Suisse sacked a number of traders after they were suspected of inflating the value of their investments in an attempt to boost their end-of-year bonuses.

Mr Sants said in a speech: "Where traders receive immediate reward and do not bear the consequences of losses is a risk to shareholders.

"The assessment of remuneration structures is part of our supervisory approach and we will emphasise this more in the future."

The regulator wants banks to ensure the way bonuses are calculated means employees not only benefit from the upside of a deal, but are also affected by its longer-term performance.

Most incentive schemes do not reflect this at the moment.

One option is for the compensation packages to be deferred, much like the options that are paid to staff in instalments over several years.

There could also be a clawback system for the bonus if a transaction later performed poorly.

Mr Sants said that when his officials evaluate bank risk, they will now examine the way bonuses are structured and include this in the assessment.

He added: "I do believe the regulators need to consider the risk of such structures when judging the overall risk of an institution."Also on the banking front, more than £24billion of taxpayers' money lent to Northern Rock could be "seriously" jeopardised if house prices fall sharply this year.

The warning came from the stricken bank's executive chairman Ron Sandler.

During a grilling by MPs, he said the bank's ability to repay the loan depends on the health of the housing market.

He warned: "If house prices were to decline five, ten, 15 per cent, that would seriously impede fulfilling the plan."

There is intense pressure on Mr Sandler to succeed at Northern Rock, particularly given his huge £90,000-a-month salary.

The Council of Mortgage Lenders has predicted that house prices will fall seven per cent this year, possibly more.

And Housing Minister Caroline Flint was recently photographed carrying a note saying prices will be "at best down five to ten per cent year-on-year".

The loan from the Bank of England must be paid off in full by the end of 2010. Northern Rock has so far paid back £2.8billion.

Concerns have already been raised about the quality of the bank's mortgages.

Its trading statement, published last week, showed soaring numbers of customers falling behind with their mortgage repayments.

At the end of the year, 0.57 per cent of its mortgage customers were three or more months behind with their payments. By the end of April, this had risen to 0.95 per cent.

Northern Rock has about 700,000 remaining borrowers, but is keen for the majority of them to take their loans elsewhere when their current deal ends.

This could prove difficult if their properties plummet in value.

Speaking to MPs on the the Treasury Select Committee on Tuesday, Mr Sandler insisted the plan is on target.

He said: "In the present housing climate, if things remain as they are, the plan can and will be delivered.'"