THE Bank of England has begun an investigation into traders' bonuses, amid concerns that dealers are being encouraged to take huge risks with their banks' capital to maximise their profit related bonuses, a spokesman said yesterday.

The study, which will be conducted by a leading economist from, the London School of Economics among some 20 financial institutions, comes in the wake of the spectacular collapse of Barings last year.

In the City, the practice of linking dealers' bonuses to their performance in proprietary trading in which they bet with the bank's capital rather than carrying out orders for clients is seen by many financiers as a recipe for disaster.

One top banker said "What they want to know is, first, the extent to which the trader bets the shop and secondly, whether the bank realises he has bet it".

Nick Leeson's losses out of Barings' Singapore office, which mounted up over a two year period, went undetected right up until the bank's collapse in February.

The central bank official said the project has been sponsored by the Bank of England to look at how the dealers' bonus packages "affects the incentives and attitudes to risk taking".

But he stressed that the Bank did not plan to force changes on the City. The Bank of England does not intend to "interfere in the ways in which banks and other financial institutions pay their staff," the spokesman said.

The report's author, Margaret Bray of the London School of Economics said a first draft might be completed by the spring.

An official from the Dutch banking group ING, which bought up Barings in March, expressed support for the investigation "If it sheds some light on how things work in the sector, then we welcome it."