Brussels, 15/06/2010 (Agence Europe) - On Monday 14 June, MEPs on the European Parliament's economic and financial affairs committee adopted a draft report by Arlene McCarthy (S&D, UK) on the draft Basel III Directive on bank pay and bonus policy and capital requirements for complicated financial products and deals included in negotiating portfolios (see EUROPE 9941). They set out details of rules on pay and bonuses at banks that have received public funding or bailouts. The hope is still that the directive can be formally adopted in first reading in July because the Council of Ministers agreed to the draft in November 2009 (see EUROPE10017). The new rules are designed to deliver a robust and fair remuneration system that encourages long-term stability, not excessive risk-taking. McCarthy commented: “The new rules on bank capital will ensure that banks put aside enough money to cover losses on high-risk trading, such as complicated mortgage-backed securities which they are still holding on their books from before the crisis”.
The three EU institutions with law-making powers have agreed to introduce a pay and bonus policy that is conductive to efficient and proper risk management and which reflects genuine performance over a period of several years. National supervisors will have the power to take effective and proportionate disincentive measures to punish banks that break the new EU rules.
The MEPs say that in the event of bad financial performance, banks should claw back bonuses. Bonuses may, on an exceptional basis, be guaranteed during the first year of employment but must not be paid using financial vehicles or systems that would enable them to get round national tax rules. The MEPs believe that pay policy must introduce a degree of fairness between the highest and lowest paid. Banks will be required to have their own control committees to monitor application of pay and bonus policy.
The parliamentary committee also sets details on rules on pay: - Bonuses must be capped so they cannot be larger than salary; - at least 40% of a bonus or 60% of large payouts should be deferred for at least 5 years; - this can be clawed back if performance is less than expected; - at least 90% of income paid immediately should be paid in the form of contingent capital, a type of IOU or capital that can be turned into bank shares. This would be kept for at least 5 years; - cash bonuses should be limited to 6% of total bonus; - bank shareholders receiving more than 25% of total income in shares should be able to vote on the issuing of any dividends.
The MEPs have introduced new rules for banks bailed out by the public purse. They argue that pay should be restricted to a proportion of net income when it does not match policy to ensure a fundamental capital basis and phasing out of the state aid. “No bonuses should be paid to directors of state-owned banks until taxpayers are repaid, and there should be a €500,000 cap on their salaries”. In a press release, Pascal Canfin (Greens/EFA, France) commented that in France, this will directly impact on the pay received by François Pérol, the chairman of the board at Banques Populaires-Caisse d'Épargne, who could receive up to €1.6 million in pay in 2010 although the bank has still not paid back taxpayers money used to bail out Natixis.
On trading correlation, the committee agrees with the Basel Committee and with industry. Unlike the Commission's initial draft, it would require risk assessment to be net rather than gross. The MEPs stress the public information requirements for complex securities deals. (M.B./transl.fl)