FSB says message for banks is rebuild capital base

LONDON Sat Sep 5, 2009 3:07pm EDT

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LONDON (Reuters) - There is an argument for slapping limits on pay packages at banks receiving taxpayer support and all banks should focus on rebuilding their capital, Financial Stability Board chairman Mario Draghi said on Saturday.

The G20 finance leaders have asked the FSB to look at bank pay and bonuses in time for a G20 leaders' summit in Pittsburgh later this month.

Banks profits are improving again mainly due to cheap government and central bank support, and public anger has grown at signs that huge payouts to staff will continue despite last year's collapse and subsequent bailouts.

"Banks should be told, first of all, it's a good time to rebuild capital, that when they decide about dividends, share buybacks and compensation, they should have in mind the first priority to use this window of opportunity now to rebuild their capital stock," said Draghi, who is also Governor of the Bank of Italy.

"More also needs to be done to make our financial system more resilient and to make sure that what we lived through does not happen again anytime soon," Draghi told reporters.

The G20 meeting of finance ministers sidestepped a French call for caps to be introduced on bankers' pay immediately.

Instead, the FSB will provide guidelines in time for the G20 summit in Pittsburgh on Sept 24-25 for national supervisors to enforce high-level principles on remuneration the G20 adopted in April.

"There is also a good case, for banks being supported by governments and having access to public support, there is a case to be made on public policy and prudential grounds that for as long as official support measures are in place, the level of compensation should be reduced so as to retain and build capital in firms to meet higher future capital requirements," Draghi said.

Significantly higher bank capital and capital quality levels would not be introduced overnight so the banking sector will have plenty of time to adjust, he added.

The meeting did not specify a level for capital and Canada's Finance Minister, Jim Flaherty, said it will be left to national authorities to decide on what levels are appropriate in each country.

PAY GUIDELINES

France was concerned that U.S. Treasury Secretary Timothy Geithner's plan for a new international accord on bank capital indicated the United States was dragging its feet on implementing the current Basel II capital rules.

But the Treasury said it was sticking to its timetable for adopting Basel II.

Draghi also sought to play down any friction by saying the Geithner plan was fully in line with what has been discussed at the FSB and with steps being taken by the Basel Committee to toughen up its rules.

"The most important project we have to get things straight and right and to have a clean break with the past is the reform and rebuilding of the Basel II framework," Draghi said.

The FSB's detailed guidelines on pay will cover oversight of pay policies, the requirement for a link between a bank's total bonus pool and overall performance, the proportion and length of deferred bonuses, clawback arrangements, and vesting periods for shares and options, Draghi said.

There should be enhanced disclosure of pay policies at all levels of a bank and of how pay relates to risk and performance over time but will not look at actual levels of pay.

Separately, the FSB will explore possible approaches for limiting bonuses, Draghi said.

Big banks already structure pay packages along the lines laid out by the FSB and G20, though elements such as clawbacks were new, lawyers said.

"If you look at the structures they have at the moment, everything is there," said Paul McCarthy, a lawyer at Allen & Overy.

"They are fighting battles that have already been won," added Nicholas Stretch of CMS Cameron McKenna.

"The real fear is limiting the actual amount of pay. For some time now, banks know they have to wrestle with the structure of pay," Stretch said.

The difficulty of limiting bonuses is highlighted by the example of RBS bank, majority owned by the UK government, which has offered guaranteed bonuses to some staff, Stretch said.

(Reporting by Huw Jones, editing by Patrick Graham)

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