Incoming watchdog says banks must show restraint on bonuses The incoming banking watchdog has warned Britain's lenders that they should cut back dividends and bonuses if they have overstated the levels of protective cash buffers they hold. While banks could strengthen their balance sheets by buying back debt, the Bank of England's financial policy committee (FPC) said they should show "restraint on distributions and compensation." The FPC also said banks could sell off "non-core" assets or businesses, providing this did not choke off the supply of credit to households and companies. Last week, the FPC said the UK's four largest banks - Barclays, HSBC, Lloyds and Royal Bank of Scotland - could have to increase their capital reserves by as much as £35 billion between them to protect against bills for customer redress and loans turning bad. In its financial stability report, the committee urged the Financial Services Authority (FSA) to reassess whether lenders" capital properly reflects their assets and the scale of future fines, and said the current watchdog should make sure firms either raise capital or take steps to restructure their balance sheets without hindering lending to the real economy. The FPC, chaired by Bank governor Sir Mervyn King, was formed as part of a wider shake-up of the regulatory system and is currently operating in an interim capacity. It will oversee the two bodies - the Financial Conduct Authority and Prudential Regulation Authority - that are due to replace the FSA next year. Minutes of the FPC meeting held earlier this month showed members were concerned that banking bosses" pay deals did not take full account of the risks firms were taking, as long-term incentive plans often cover just three years" performance. The report, published yesterday, said: "Remuneration contracts could be better structured to expose executives to the potential downside over the full term of the risks they take." While the committee said concerns over the troubled eurozone had eased since the summer, "imbalances within the euro area continued to be substantial, with ongoing uncertainty about how they would be resolved in the medium term."