A top Bank of England official has called for policy intervention to crack down on "financial arms races" in the City.

Speaking at the Institute for New Economic Thinking in Berlin, Andrew Haldane, executive director for financial stability and a member of the Financial Policy Committee (FPC), argued that structural features of the financial system can make it prone to arms-race-type behaviour.

Although financial arms races are not a new phenomenon, they have intensified with the growth of the financial industry over the past 30 years. Haldane used three examples to demonstrate this point.

First, he noted that performance measures in banking, such as returns on equity and executive compensation, rose dramatically in the run-up to the 2008 financial crisis. As banks tried to keep up with their competitors by growing their balance sheets, returns on equity and executive pay spiralled. Generally, the bigger a firm's market value, the bigger the bonus.

"That Himalayan rise in bank executive salaries made the financial sector salary boom of even the 1920s look like a foothill," said Haldane. This resulted in a "high-leverage equilibrium" that "sowed the seeds of the financial crisis".

Secondly, the technological revolution in financial markets created a quest for speed in trading activities, dubbed a "race to zero". Haldane argued that the emergence of high-frequency trading, which has some clear benefits, also created uncertainties. Thirdly, investors' pre-crisis quest for return has been replaced by a quest for safety. As a result, a large and rising number of global banks' refinancing has taken place on secured terms. But Haldane argued that the quest for individual safety may generate system-wide instability: "At high levels of encumbrance, the financial system as a whole may even be riskier, as it is more susceptible to pro-cyclical swings in the underlying value of banks' assets."

Haldane suggests that these arms races – in return, speed, and safety – could have been prevented. But to be effective, policy intervention would have needed to constrain behaviour across the financial system as a whole. In other words, "policy needs to have a macro-prudential, as distinct from micro-prudential, perspective".

Haldane then turned to the tools that agencies such as the FPC might need to tackle financial arms races. Constraints on banks' leverage could have "defused the return on equity race at source". Restrictions on cash distributions by banks, a favoured recommendation of the FPC over the past six months, can also help. Haldane welcomed measures such as maximum order cancellation ratios and strengthening circuit-breakers to curb speed races in financial markets. Finally, the FPC has paid increasing attention to the systemic risk posed by rising levels of bank encumbrance (the fraction of banks' liabilities that are secured against their assets). Haldane suggests that greater transparency and maximum limits on asset encumbrance could be considered.