Banker-Pay Curbs Added to EU Rules for Bailed-Out Lenders

Pay curbs at bailed-out lenders will be added to revamped European Union rules on state aid as the regulator also seeks to toughen requirements for creditor losses.

Restrictions on pay, currently imposed on a case-by-case basis, will become a formal part of the EU’s response to approving taxpayer-funded rescues at stricken lenders, according to a copy of the draft plans obtained by Bloomberg News. The plans also include toughening requirements for bank creditors to face losses before taxpayers are on the hook.

The updated guidance will make clear that “any entity relying on state aid for its restructuring or orderly winding down should normally make changes to its top management and apply strict executive remuneration policies,” including a “cap on remuneration” for executives, said the draft by EU Competition Commissioner Joaquin Almunia’s officials.

The measures add to general curbs on banker bonuses secured by lawmakers earlier this year that will ban executives from receiving awards worth more than twice their fixed salary. Fund managers may face similar EU limits as part of a push to rein in excessive payouts that encourage risk taking.

‘Cultural Shift’

“Banks who increase systemic risk through bad practices should certainly be obliged to alter their remuneration strategies,” Dominic Johnson, chief executive officer of Somerset Capital Management LLP, said by e-mail. “Organizations will probably game the system rather than run better operations” so a “cultural shift” is preferable to more rules, he said.

Antoine Colombani, a spokesman for Almunia, declined to comment on the document.

EU governments have provided 1.7 trillion euros ($2.2 trillion) of support to their banking systems since the 2008 collapse of Lehman Brothers Holdings Inc., according to European Commission data. Nations have dealt with failing banks in a variety of ways. While the Netherlands in February nationalized SNS Reaal NV without writing down unsecured senior debt holders, such bank creditors were in the firing line as part of the euro area’s bailout of Cyprus.

Aside from the pay limits, the new guidelines would require shareholders and junior creditors at a failing bank to face losses before public money is provided to shore up the lender’s capital, according to the document, which was discussed by national officials last week. The updated guidelines would apply from August 1.

Creditor Losses

A lack of clear EU rules on bank creditor losses means investors may gravitate to lenders in nations with the most robust public finances, due to a belief that they’ll be less likely to face writedowns, according to the document.

Markets are already taking this into account, “as a result of which funding costs for banks in countries with (perceived) weaker sovereigns have increased,” the Brussels-based commission says in the paper.

Similar pay curbs to the ones in the draft EU guidelines have already been imposed as part of many individual state aid decisions taken by the commission, according to the document.

The updated rules will “pave the way for a smoother transition” to planned EU legislation for dealing with banking crises, according to the document.

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