Banks may have to disclose profits from carry trades derived from 1 trillion euros ($1.3 trillion) in European Central Bank loans and exclude the money from bonus pools, under draft proposals from European Union lawmakers.
Profit from carry trades, where investors borrow money at a low interest rate to buy higher yielding securities, “should not count toward computation of remuneration and bonus pools” at banks, under plans being weighed by European Union lawmakers, according to a document obtained by Bloomberg News. The measure is one of dozens of proposed amendments to legislation to implement global capital and liquidity rules for EU lenders.
The ECB began two rounds of extraordinary three-year loans at an interest rate of 1 percent in December in its longer-term refinancing operations to ease funding conditions for European banks. ECB President Mario Draghi yesterday left open the option of further stimulus if the region’s economy continues to deteriorate.
Banks should disclose “profit made from the ECB LTRO through carry trades” according to proposed amendments from members of the EU parliament contained in the document.
Lawmakers have proposed measures to shake up bankers’ pay in the framework, which would implement international capital standards, known as Basel III, in the European Union.
Sharon Bowles, an EU lawmaker identified as the author of the LTRO proposal in the document, didn’t immediately respond to an e-mail seeking comment. Chantal Hughes, spokeswoman for EU Financial Services Commissioner Michel Barnier, declined to comment on the proposals.
Among the amendments sought by members of the parliament is one by Othmar Karas, the Austrian Christian Democrat lawmaker leading work on the draft rules in the assembly, to ban bonuses that exceed a banker’s salary.
The document, sent to lawmakers for their comments, also contained a proposal to give the European Banking Authority more powers. The agency would be able to carry out” surprise inspections at banks’ major branches, according to a proposal in the report.
As in a previous draft, Europe’s biggest banks may need to hold additional core-capital reserves of as much as 10 percent under the plans.
National EU finance ministers failed to agree at meetings that ended yesterday in Brussels on how to set additional capital buffers for lenders.
Ministers will try to bridge differences during the next two weeks, defying a warning by German Finance Minister Wolfgang Schaeuble that failure to reach decision at this meeting “will be dangerous.” If no consensus is achieved, a decision could be taken through a majority vote.
Agreement among finance ministers will serve as a basis for negotiations with the European Parliament, which could begin later this month. The EU faces a Jan. 1, 2013, deadline for adopting the rules, agreed on by the Basel Committee on Banking Supervision.
Lenders also faced increased disclosure requirements under the measures proposed by members of the EU parliament.
They may have to reveal their risk management procedures, lending to small and medium sized businesses as well as detailed information on senior managers’ bonuses and the links between their pay and performance.