Europe Takes Aim at Bank Bonuses
The debate surrounding bankers' bonus payments has finally reached Brussels. In an interview with the daily Hamburger Abendblatt, European Commissioner for Enterprise and Industry Günter Verheugen said that the European Union will reach an agreement very soon on limiting the income of bank managers.
Verheugen also told the paper that the European Commission believes that, when it comes to a bank's system of compensation, there should be "no direct relation with a company's short-term profits." Instead, he is confident that the EU's member states and parliament will be able to reach a swift agreement on the issue.
Likewise, Verheugen also voiced his support for measures to impose high taxation rates on the bonuses of bankers whose companies receive state support. "What we're really talking about here," Verheugen told the paper, "is figures arising when a company has been kept alive by the state for a long time."
Enter Sheriff SarkozyFrance, in particular, has joined Germany as one of the countries trying to impose the toughest restrictions on executive compensation. On Tuesday, French President Nicolas Sarkozy announced that Paris will impose strict controls on the bonuses banks pay to their employees. Following a meeting with France's leading bankers and the French Banking Federation, Sarkozy said that bank employees should also be held accountable for poor performance by having their bonus payments reduced.
Sarkozy stressed, however, that the system would only work if it were implemented on the international stage. "Everyone understands that these limits can only be international," Sarkozy said. "If we just decided to limit them to France, everyone would leave." Sarkozy is pushing for an international agreement on the issue at the Group of 20 meeting of industrialized and developing countries to be held in Pittsburg on Sept. 24-25.
France's plan calls for Michel Camdessus, the former managing director of the International Monetary Fund (IMF), to review the bonuses paid out to stockbrokers and, in particular, those on a list of the 100 highest-paid traders at each French bank. In the future, a large part of bonus payments will be withheld and paid out over three years. The system also envisions a "malus" element, which would penalize traders by reducing the amount of the withheld bonus for investments that turned out to be money-losers.
Sarkozy also warned that, "We will not work with banks that do not apply these rules," meaning that banks that prefer to not play by these rules will be shut out from state-sponsored financing opportunities.
Even France's banks have welcomed the plans so far. Baudouin Prot, the incoming head of the French Banking Federation and the chief executive of France's largest bank, BNP Paribus, said after the meeting that the banks would implement the malus system for brokers who caused losses and that the banks needed to strengthen both controls and transparency. Prot stressed, however, that such a system could not be put into effect "in just one country" because it would encourage banks to take their business elsewhere and thereby only benefit others.
Reducing Risky BusinessThrough a spokesman, Sarkozy stressed that he wanted to bring a "strong message" to the G-20 summit that France wants to have "more regulation of the international financial markets and limits placed on payments" to bank employees. In a meeting with his cabinet, according to Housing Secretary Benoist Apparu, Sarkozy underlined that it shouldn't be possible for "bankers to stuff their pockets" in an era when the global financial crisis has cost thousands of people their jobs.
"No one has forgotten that the financial sector is at the origin of this crisis," Sarkozy said in his meeting Tuesday with bankers, according to the Associated Press.
The controversy surrounding bank bonus payments was rekindled in early August when reports surfaced claiming that BNP Paribas was setting aside €1 billion ($1.43 billion) for investment-banker bonuses despite the fact that it had received €5 billion in state support. However, France's central bank has declared that the bonus plan did not violate the regulations G-20 nations agreed to at a summit held in February in London. In February, French banks had already agreed to extend bonus payments over longer periods of time and to put limits on so-called guaranteed bonuses, which are paid out irregardless of performance.
Germany's PositionThe French proposals have found a cheerleader in Germany in the form of Finance Minister Peer Steinbrück. In a statement released earlier in the month, Steinbrück noted that: "There shouldn't be any more excessive pay and false incentives for exaggerated risk. So it's right for banking regulators to be putting the spotlight on payment rules." On Wednesday, he told the business daily Handelsblatt that he will be joining France in pushing to get the issue on the agenda for the G-20 meetings.
Steinbrück went on to tell the paper that several bankers have "just not gotten the message." "When even those who were involved," he said, "don't think that they share some responsibility for the safety and legitimacy of the system of the social market economy, then they can't be helped."
At the same time, Steinbrück did note that he did not think putting direct caps on bonus payments was the right approach and that, instead, he preferred to use taxes as a means of influencing such payments. "I am for tax-related limits," he said, "but I am also aware that there might be certain legal issues related to how such additional claims might not be allowed by private contract law."
wal/jtw—with wire reports