Bankers’ pay should be more transparent to investors to prevent lenders from hiding policies that encourage irresponsible risk taking, global regulators said in draft proposals.
International rules on the disclosure of pay “will allow market participants to assess the quality of a bank’s compensation practices and the incentives towards risk taking they support,” Fernando Vargas, chairman of the Basel Committee on Banking Supervision’s task force on remuneration, said in a statement published on the group’s website today. The proposals will “support effective market discipline,” said the committee, which is seeking views on its plans until Feb. 25.
Countries are imposing rules on bankers’ pay to prevent a repeat of the excessive risk taking that they say contributed to the global financial crisis. European Union regulators earlier this month imposed limits on cash payouts and the size of bonuses in the industry.
The Basel committee’s proposals will “let the markets judge” whether a bank is behaving responsibly “rather than just the supervisors,” Karel Lannoo, chief executive officer of the Centre for European Policy Studies, said in a telephone interview today.
Banks should disclose the main criteria used to decide on bonus awards, according to the Basel committee. Lenders should also release figures showing whether they are cutting planned bonuses when the person’s or the bank’s performance is weaker than expected, releasing the “number and total amount” of any reductions, the group said. Cuts on deferred payments from past bonus awards would also have to be revealed.
‘Diminish or Disappear’
Regulators have called for the size of bonuses to be linked to success. “Bonuses should diminish or disappear in the event of poor firm, divisional or business unit performance,” the Financial Stability Forum said in a set of principles in 2009. The organization, which brought together regulators from some industrialized nations, was replaced last year by the Financial Stability Board.
The requirement to disclose whether bonuses are reduced in line with performance is “probably the most important point” in the proposals, Lannoo said. “Now they should explain, if the performance of a bank is not what it should be, how they would adjust remuneration.”
Lenders should also reveal the policies and criteria they have in place for deciding on these reductions, the Basel group said, as well as for determining when to claw back money that has already been paid out in bonuses. Banks should disclose the information covered by the proposals at least once a year.
“It’s hard to see what benefits, in terms of making the financial system more efficient or reducing risk, would be achieved by requiring firms to publish further information” than already required by regulators, Rob McIvor, a spokesman for the Association for Financial Markets in Europe, said in a telephone interview before the publication of the Basel committee’s proposals.
AFME’s members, which include Switzerland’s UBS AG, Deutsche Bank AG of Germany and France’s BNP Paribas SA, will “fully” implement rules on the payment of bonuses that have been agreed by EU regulators, McIvor said.
Banks should reveal the amount they pay out in bonuses each year, and how many staff receive one, the committee said. They should also release information on what percentage of bonus payments have been deferred, and how much is paid out in shares instead of cash, as well as disclose the number and total amount of “guaranteed” bonuses paid out during the financial year.
‘Lift the Lid’
“Transparency will lift the lid on what exactly is going on,” said Sharon Bowles, head of the European Parliament’s economic and monetary committee. “We should welcome the push from Basel to have more convergent international standards,” she said by telephone today. Looking into the methods of how bonuses are calculated is “a very good way forward,” according to Bowles.
The Basel committee brings together regulators from 27 countries including Brazil, China, India, Germany the U.K. and the U.S.