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Home > Regulation > EU Directives

Regulator hints at further clampdown on bank bonuses

European Banking Authority says banks fail to align remuneration to risk as it announces new bank capital rules.

By Donia O'Loughlin | Published Apr 13, 2012 | comments

The European Parliament could further limit the variable remuneration to banking staff on the back of a survey by the European Banking Authority that showed banks across the continent are failing to align the calculation of employee bonuses with the risks they take.

Lenders use “underdeveloped techniques” to link pay with risk-taking and lack consistent tools for selecting which workers should be subject to bonus regulations, the EBA said in its report laying out the results of a survey it conducted on remuneration guidelines.

The EBA’s predecessor, the Committee of European Banking Supervisors, set bonus rules in 2010 that limited upfront cash pay-outs to about one quarter of the total bonus to ensure incentives were linked to the long-term performance of the firm.

Research from the EBA revealed huge disparities in bonus sizes across the region and big differences in enforcing the existing pay rules, with the regulator noting “very high” ratios of variable pay to fixed pay.

The report adds that lawmakers in the European Parliament may seek a ban on banker bonuses that exceed fixed pay as part of a draft law implementing the most recent Basel capital rules.

The report said: “If the potential variable remuneration is the dominating part of the total remuneration, this could incentivise staff to take too much risk in order to assure a certain minimum pay level.

“Some supervisors informally communicate to their institutions a certain numerical maximum ratio of variable to fixed that they consider as appropriate; this allows them to obtain a clear level playing field in the whole sector under their supervision.”

According to the EBA survey, some bankers were receiving bonuses about 10 times larger than their base salary.

The data show that the median of the average ratios is 122 per cent for executives and 139 per cent for other risk-takers such as traders. The highest reported values of these maximum ratios were 429 per cent for executives and 940 per cent for the other identified staff.

The ratios banks use to calculate variable pay versus fixed salary “tend to be high,” the EBA said in the report. It said: “The criteria by which institutions decide on the ratios in practice are not always clear.”

EU-wide limits adopted in 2010 on upfront cash payments are supposed to apply to top managers and anyone else who can have a significant effect on the bank’s business.

The EBA found that 10 per cent of bank employees are caught by deferral rules in some countries but fewer than 1 per cent in others.

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