Future bonus and dividend payments by UK banks will depend upon convincing regulators the handouts will not dent capital reserves or undermine sound risk management, the head of the city watchdog has warned.
Banks would also be forced to make public detailed information about their holdings that they currently share only with regulators, Hector Sants told the Financial Times as he prepared to unveil the detailed plans for a new authority that will supervise banks and insurers for safety and soundness.
Some investors have long complained that banks provide only cursory, non-standard data that makes it all but impossible to compare their relative risk.
"In recent years there has been a shift into more market opacity and a reduction in investor confidence. We are trying to redress that balance," said Mr Sants, who is head of the Financial Services Authority, and who will head up the planned Prudential Regulatory Authority.
"We want to improve the ability of market discipline to incentivise management to act responsibly."
A sign of the increasing demand for top executives to be held accountable for their bank's performance came on Wednesday when Lloyds Banking Group signalled at its annual meeting that it could claw back part of the bonuses awarded to several of its top executives as a result of the £3.2 billion hit it took for mis-selling loan insurance.
The UK is radically revamping its approach to financial services regulation after a wave of bank failures revealed deep failings in its previous hands-off approach.
The FSA is being split into the PRA and a separate Financial Conduct Authority focused on markets and consumer protection.
Draft legislation creating the two authorities is due to be unveiled next month, with the aim of establishing them in early 2013.
Roughly 25 percent of the FSA's 4,000 employees will be transferred to the PRA, which will be a subsidiary of the Bank of England.
Housing prudential supervision in a more focused agency is expected to allow managers, including Mr Sants and his deputy Andrew Bailey, to take a more active role in supervising individual institutions.
The FSA last year was given the power to veto bank bonus plans but the PRA now plans to integrate that process into its broader supervisory process.
"The PRA will assess firms' payments of both bonuses and dividends against their compliance with our capital regime, but that will be part of the ongoing supervisory process.
We see things as part of a dialogue, not a pass, fail process," said Mr Sants.