EU Bonus Cap Risks Banks’ Efforts to Raise Capital, Bailey Says

A proposed European Union ban on bonuses that exceed fixed pay would harm banks’ ability to build up capital, said Andrew Bailey, the U.K.’s chief banking supervisor.

Bailey, who is chief-executive-elect of the U.K.’s Prudential Regulation Authority, said at a Paris conference he was “skeptical and concerned” about the plan to limit bonuses, because it would “make the cost base inflexible and make it more difficult to retain earnings and build capital.”

Lawmakers in the European Parliament have insisted that the legislation to implement Basel capital rules include tougher curbs on variable pay. European regulators already agreed on bonus rules in 2011, including minimum three-year deferrals, blaming large cash payouts for encouraging the type of risk-taking that led to the 2008 collapse of Lehman Brothers Holdings Inc. and the subsequent financial crisis.

“It also makes it harder to pull back remuneration when things have gone wrong,” Bailey said at the Economist conference. “Clawing back unvested remuneration when things have gone wrong is a big part of what we are pushing for. We favor longer time periods for vesting.”

Lawmakers will tomorrow resume negotiations with governments on the bonus rules, as part of an attempt to seal a deal on how to implement the so-called Basel III accord in the EU.

Banks should defer bonus payouts for staff for as long as 10 years to improve “prudence” in remuneration, Andrew Haldane, executive director for financial stability at the Bank of England, said last month.

Insider Trading

The current window is “far too short to capture the cycle in credit” and a period of five years to 10 years would be better, Haldane said at a hearing of the Parliamentary Commission on Banking Standards in London. “We had roughly a 20-year boom in the run-up to this crisis, so measuring performance only over a three or five-year window is far too short.”

The Financial Services Authority will be split up into two separate agencies on April 1. Bailey will lead the PRA, which will set rules on capital, liquidity and bonuses for U.K. banks. Market conduct issues, such as insider trading, will be dealt with by the Financial Conduct Authority.

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