Call for bank bonuses to be paid in debt Banks should pay bonuses in debt, which would be wiped out if a bank failed, an EU banking report will suggest as Europe attempts to step up the fight against bankers" pay. The Liikanen commission, an independent review set up almost a year ago by EU commissioner Michel Barnier, will on Tuesday recommend reforms for long-term pay incentives as well as advocating ringfencing trading activities to make big banks safer. IN Brussels Some of the panel's most radical measures have been toned down and Mr Barnier will make a full assessment before deciding to include any of the Liikanen proposals in his reforms. The Liikanen review comes amid a difficult impasse on bank capital rules between EU member states and the European parliament, which is pushing hard for a strict ban on bonuses that exceed fixed pay. Its ideas could form part of a potential compromise. Using bonds as a currency for bonuses is designed to avoid the dangers of paying shares that could motivate high risk-taking in a bid to boost profits and share prices. Paying bonuses as debt was used in 2009 by UK banks Royal Bank of Scotland and Lloyds Banking Group when the British government imposed restrictions on bonuses being paid in cash or shares. For many staff, however, the arrangement proved popular, because while bank share prices were falling and no dividends were being paid, they received bonds whose par value was guaranteed, paying generous coupons. Most contentious in the Liikanen review is a call for Europe's biggest banks to create a separate entity for their trading activities - a twist on the UK's Vickers Commission, which last year recommended that banks" retail operations should be ringfenced, and the US's Volcker rule that limits proprietary trading. Banks will be relieved that the threshold for requiring a ringfence is higher than first discussed by Erkki Liikanen, the Finnish central bank chief, and his committee. Only big banks with more than a €100bn of trading assets, representing between 15 and 25 per cent of its total balance sheet, will be forced to separate trading activities. In addition the review backs the use of leverage ratios to measure overall borrowing and criticises the use of internal models to measure risk, according to people briefed on the conclusions. "Bail-in" bonds are a model for future unsecured debt issuance by banks, where regulators can potentially wipe out the bond's value if a bank gets into financial difficulty. Lord Myners, the former City minister who helped design the RBS and Lloyds pay arrangements, said on Monday: "Loss-absorbing debt gives greater alignment to staff than equities. It gives at least some of the motivation that a partnership structure does to keep a bank healthy. The news comes as it emerged that the UK parliament's Commission of Banking Standards was set to reopen the debate on the structure of British banking. Writing in the Financial Times, Andrew Tyrie, who chairs the commission, said Paul Volcker - the former US Federal Reserve chairman - would appear before the panel of 10 MPs and peers. Mr Volcker's appearance before the commission will fuel suggestions that the UK is taking a fresh look at structural reform of Britain's banks along the lines proposed by the Vickers Commission last year.