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Global regulators plan checks on bank bonuses

Published 04/02/2009, 10:29 AM
Updated 04/02/2009, 10:32 AM

By Huw Jones

LONDON, April 2 (Reuters) - Bonuses at banks must be supervised this year to try to discourage risky investments that helped bring several companies to the brink of bankruptcy, a top financial regulatory body said on Thursday.

The Financial Stability Forum of leading central bankers and regularly bodies also said that banks would have to put aside more and higher quality capital to provide a cushion against potential losses.

"Compensation practices at large financial institutions are one factor among many that contributed to the financial crisis that began in 2007," the FSF said in a policy document.

"High short-term profits led to generous bonus payments to employees without adequate regard to the longer-term risks they imposed on their firms," the FSF said.

FSF members -- which are due to include all G20 members, Spain and the European Commission -- must commit themselves to applying principles agreed by the forum.

The principles become effective immediately.

The FSF has drawn up principles on remuneration for national regulators to apply. They were presented during a summit of the G20 group of industrialised and emerging market countries in London on Thursday to apply lessons from the financial crisis.

There has been public outcry in the United States, Britain and elsewhere over bonuses, especially those given by banks that received taxpayer money to stay afloat.

One principle says the board of a bank must actively oversee how compensation schemes are designed and monitored.

"Authorities expect evidence of material progress in the implementation of the principles by the 2009 remuneration round," the FSF said.

The FSF proposals also detailed planned changes to bank capital rules and how national supervisors cooperate to try to answer critics who say the G20 is failing to put pledges of regulatory reform into action.

The FSF also said the global Basel Committee on Banking Supervision would put forward a raft of draft changes to bank capital rules before the end of 2009 for consultation.

The Basel Committee's Basel II standards have been criticised for being procyclical or exacerbating crises.

The Basel Committee will propose a simple ratio to contain bank leverage as a supplement to its current "risk based approach" to determining capital requirements.

Banks would also have to build up buffers in good times to be run down when markets turned sour and avoid the need for huge taxpayer bailouts.

"They will be implemented over time once conditions in financial markets return to normal," the FSF said.

The FSF also published principles for supervisors, central banks and finance ministries to cooperate in making advanced preparations for dealing with financial crises and in managing them when they happen.

The authorities from different countries would commit to meeting regularly alongside core supervisory colleges that the G20 wants set up for each major cross-border financial institution to spot problems earlier and intervene quickly.

"The FSF will act as a clearinghouse for experiences in information sharing and contingency planning for the benefit of its members," the FSF said.

The G20 held its first summit on the financial crisis in November 2008 and set itself a March 31 deadline for setting up the colleges of supervisors.

Colleges have been set up for most of the big cross-border groups identified and many of them held face-to-face meetings by the end of 2008, the FSF said.

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