LONDON (Reuters) - Regulators should be able to fine banks that reward staff for excessive risk taking, draft EU plans say, arguing that any impact on attracting talent is a price worth paying for greater market stability.
The draft plans from the EU’s executive European Commission are part of a reform of the bloc’s bank capital requirements rules (CRD) to make markets safer for investors rattled by the credit crunch that left banks vulnerable.
There has been public anger in Britain and elsewhere that bankers at institutions that needed taxpayer cash to survive the market crisis walked away with huge bonuses.
EU Internal Market Commissioner Charlie McCreevy is due to publish the draft law next week. Its outline has already been flagged but banks have been waiting for greater detail.
It will give regulators direct supervisory powers over remuneration for the first time by imposing a “binding obligation” on credit institutions and investment firms to have policies that promote sound risk management and remuneration.
“The purpose of this proposed amendment to the CRD is to ensure that supervisors may also impose financial or non-financial penalties (including fines) against firms that fail to comply with the obligation,” the draft law obtained by Reuters said.
Other sanctions could include higher capital requirements or order a firm to make changes so that pay policies don’t encourage risky short term activities that threaten a bank’s long term survival.
“Therefore, there might be an impact on attracting or retaining talent at the overall sector level which might have a negative short-term implications for the international competitiveness position of EU firms,” the draft said.
Safer remuneration principles imply a “trade off that includes long-term benefits ... in terms of a more stable and less procyclical financial system,” it added.
Supervisors would not set levels of bonuses and firms would remain responsible for designing and implementing pay policies, the draft said.
The draft law will need to be adopted by EU governments and the European Parliament to take effect in 2011 and is likely to be subject to changes.
It will increase the amount of capital banks will have to set aside to cover risky assets held on their trading books.
Adding an additional capital buffer “may be expected to roughly double the trading book capital requirements given the current environment,” the document said.
Capital requirements for re-securitization positions of banks will also be increased.
“For particularly complex re-securitizations, the proposals would reinforce both the due diligence requirements and the supervisory process to enforce them,” the draft said.
“The supervisors will have to establish on a periodic basis whether due diligence standards for investments in certain types... of highly complex re-securitizations have been adequately met,” the draft said.
For these instruments a general deduction from capital requirement would apply unless banks demonstrate that necessary due diligence standards have been met.
“In instances where compliance with required due diligence is found to be inadequate, institutions would be debarred from investing in such instruments in future,” the draft said.
Disclosure requirements would be enhanced in several areas such as securitization exposures in the trading book and sponsorship of off-balance sheet vehicles.
The European Commission estimated such disclosure requirements will cost the EU banking industry 1.3 million euros ($1.81 million) a year in extra administration.
Reporting by Huw Jones, editing by Victoria Main