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Regulators to Discuss Cash Bank Bonuses Under EU Rules

By Ben Moshinsky and Nandini Sukumar - Oct 6, 2010 12:26 PM GMT

The U.K. Financial Services Authority is looking to CEBS to determine how to implement rules on the amount of cash in banker bonuses. Photographer: Simon Dawson/Bloomberg

European Union Financial regulators will seek to clear up confusion about how much cash bankers can receive as part of their bonuses at meetings in London today.

The Committee of European Banking Supervisors will host a meeting with regulators from the 27 EU nations. In addition to bonus rules, the financial watchdogs will discuss capital ratios for lenders, according to a person with knowledge of the agenda, who declined to be identified because the discussions are private.

The U.K. Financial Services Authority is looking to CEBS to determine how to implement rules on the amount of cash in banker bonuses. FSA proposals in July are consistent with EU rules that limit the cash portion of bonuses to 30 percent, “but we have made clear that it’s provisional because other interpretations are also possible,” Heidi Ashley, an FSA spokeswoman said in a telephone interview.

“It’s good of the FSA to push for 50 percent, but maybe a 30 percent cap is what’s necessary to put this matter to bed,” David Buik, a market analyst at inter-dealer broker BGC Partners in London, said in a telephone interview.

The EU is implementing rules on bonuses as part of a range of measures to rein in the risk taking that is blamed for causing the worst financial crisis since the Great Depression.

The FSA proposed compensation rules that require at least 40 percent of bonuses be deferred for at least three years and at least 50 percent of the bonuses be paid in shares.

‘That’s Meritocracy’

“I don’t see why small private companies or ones that are not credit-exposed and take no risk on their books -- like us -- should fall under the same rules,” said Alasdair Haynes, chief executive officer of Chi-X Europe Ltd., Europe’s biggest alternative trading system. “If there’s no credit risk you should be able to reward people as you wish. That’s meritocracy.”

Richard Balarkas, chief executive officer of the Instinet Europe Ltd. brokerage, said the strict bonus rules might drive lenders into non-EU countries.

“If I’m a highly rated analyst, I don’t understand why I’d sit in an investment bank, in a highly regulated environment where I am now personally liable for all kinds of things, in a tax regime where I give the government half what I earn,” Balarkas said in an interview. “Some of the smarter people are looking for easier and better ways to make a living.”

Basel Committee

In addition to the bonus rules, the regulators will also discuss the effect of rules on how much capital banks will have to set aside, adopted by global regulators at the Basel Committee on Banking Supervision on the economy.

The Basel Committee proposals will force lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends, though they wouldn’t be forced to raise cash. Lenders will have less than five years to comply with the minimum ratios and until Jan. 1, 2019, to meet the buffer requirements.

The Basel Committee estimated that the tougher capital requirements would trim 0.38 percent from gross domestic product in the U.S., euro area and Japan after 4 1/2 years. That’s about an eighth of the 3.1 percent reduction foreseen by the Institute of International Finance, an industry group, over five years.

‘This Is Nonsense’

Some bankers say that “every 1 percent on capital requirements means a $700 billion reduction in lending capacity,” Richard Portes, president of the London-based Centre for Economic Policy Research, said in an e-mailed statement. “This is nonsense: the banks could, for example, meet higher capital requirements by raising more capital, cutting compensation ratios, doing less risky lending, reallocating resources from trading to lending.”

The regulators at the CEBS meeting will also discuss EU plans to establish a new pan-European banking regulator next year, the person with knowledge of the agenda said.

CEBS, whose role is to coordinate national banking authorities and make policy recommendations to the EU on regulation, will take on more powers from January after the European Parliament and member states approved the creation of three supervisors for Europe’s banking, securities and insurance industries last month.

The London-based European Banking Authority will have the power to impose its decisions directly on financial firms if the U.K.’s Financial Services Authority, or any national regulator, fails to implement its recommendations.

To contact the reporter on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net;

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.