FRANKFURT, Aug 14 (Reuters) - Bankers who take unjustifiable risks in business deals will be forced to repay their bonuses under new rules unveiled by German financial watchdog Bafin on Friday.
“Aggressive compensation systems, along with other factors, contributed to the financial crisis in that they set the wrong incentives,” Bafin said in a statement on changes it is making to its Minimum Requirements for Risk Management standards.
Rewards based on short-term success spurred bankers to take unreasonably big risks but this practice would be eliminated under the new rules, the agency said.
Banks and financial service providers have until the end of the year to introduce the new standards but each institute can decide how it will apply the rules in detail.
A spokesman said the new guidelines would have the power of law and Bafin could enforce them within its regulatory remit.
Bankers around the world faced a popular backlash for awarding themselves large bonuses in the financial crisis even as their employers teetered near collapse and some turned to taxpayers to stay afloat. [ID:nLD197683]
Financial supervisors have since been drafting new rules to get banks to better take account of risk to avoid future crises.
Bafin said its rules, which also expand the regulatory requirements for stress testing, liquidity ratios and risk concentration, reflect changes to international risk standards.
In future, executive bonuses will be tied to the success of the organisation as a whole, Bafin said.
“The well-being of the employee must be linked to the well-being of the bank,” Bafin said.
“If it turns out that a transaction was not justifiable from the point of view of risk, then those responsible must repay a part or possible the whole of their bonus,” it added.
For a Take a Look on financial regulation click on [ID:nFINREG]
For a recent column on bank bonuses click on [ID:nLD436221] (Editing by David Cowell)
Our Standards: The Thomson Reuters Trust Principles.