LONDON, Oct 1 (Reuters) - Capping bankers' bonuses will not cut risk in the financial system, the International Monetary Fund said on Wednesday, offering Britain moral support in its legal challenge to EU curbs on pay in the financial sector.
In its latest Global Financial Stability Report, the IMF looks at pay in the banking sector, saying that excessive risk taken by lenders contributed to the global financial crisis.
Reforms have sought to foster more prudent behaviour by banks, including how pay packets are structured. Measures include deferring parts of a bonus for several years and the ability to claw back awards if misconduct is uncovered.
The European Union has gone further, capping banker bonuses at twice fixed salary. That has prompted some banks to bump up fixed pay by giving "allowances" to key staff.
"The imposition of overall caps ... should not be expected to reduce risk-taking given that no evidence was found that more fixed pay correlates with less risk in large banks," the IMF report said.
"The analysis shows that, in theory, a cap on variable pay may actually increase the incentive for managers to take on risk at the expense of shareholders and debtholders. Therefore, measures aimed at reducing the share of variable compensation should be subject to additional study," the IMF said.
Britain is challenging the EU cap in the bloc's top court, saying it increases risks by forcing banks to top up fixed pay, making them less nimble in cutting costs in troubled markets.
The IMF did find, however, that more pay tied to longer-term equity performance is related to less risk taking, provided banks are not distressed.
"Equity awards, especially with sufficiently long vesting periods, should therefore be encouraged," the IMF said.
The outcome of the EU court case is due in early 2015. The bloc's banking watchdog will rule this month on whether allowances are simply a ruse to get round the bonus cap. (Reporting by Huw Jones; Editing by Catherine Evans)