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Banker Bonus Securities Face Tougher EU Risk-Sharing Rules

The European Union published plans for tougher policing of securities used to pay banker bonuses in a bid to ensure that employees share the pain if a lenders’ performance dips.

Proposals approved today by the European Commission would require debt used in employee bonus payments to convert into ordinary shares or be written down when a bank gets into difficulties. The measures also include safeguards to prevent bank staff from benefiting from better terms than other investors, the Brussels-based institution said in a statement.

“The conditions specified are to ensure that the instruments adequately reflect the credit quality” of the bank and “are appropriate for use in variable remuneration,” the commission said in the e-mailed statement.

Banks in the European Union are required to pay half of bonuses in instruments other than cash in order to link the awards to the lender’s long-term performance. The rule is part of a suite of EU initiatives to rein in variable pay, including a ban on bonuses more than twice fixed salaries.

The commission published the plans as part of a set of technical standards to flesh out its banking rulebook. Other measures include rules on how to calculate risks linked to market movements in the price of derivatives contracts, and guidance on the links between capital requirements and the accounting treatment of covered bonds.

“The development of a single rule book in banking is a vast undertaking,” Michel Barnier, the EU’s financial services chief, said in the statement. “This ensures good regulation and a level playing field wherever banks are based.”

The European Parliament and national governments in the 28-nation EU have one month to raise objections to the commission’s approach. Such a step would extend the scrutiny period for an extra two months.

The measures, which follow guidance published last month by the European Banking Authority, will take effect 20 days after they are published in the EU’s Official Journal.

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