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Bonuses Paid in Subordinated Debt Should Be Mandatory, EBA Says

Senior bankers should be required to receive some of their annual bonus in bonds that would suffer losses during a financial crisis, Europe’s top banking regulator said.

A “mandatory share” of bonuses for top management should be paid in so-called bail-in bonds, which can be written down when the lender’s capital dips below a safe level, the European Banking Authority said in an opinion on proposals to separate banks’ commercial and investment units.

“Such measures could be adopted in a swift manner and may efficiently contribute to the overall efforts to reduce moral hazard and restore confidence between the public and the banking system,” the EBA said.

Michel Barnier, the European Union’s financial services chief, has said that he’s weighing proposals made by an advisory group led by European Central Bank Governing Council member Erkki Liikanen. The measures, which would force lenders to set up legally separate trading entities, are a “good basis” for future EU policy making, Barnier has said.

The EBA said the commission should consider how splitting up banks would affect their cost of funding, so as not to create “unintended adverse consequences.”

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