Bloomberg News

Bankers Face Dividend, Pay Curbs as EU Seeks Lender Boost

October 13, 2011

(Updates share prices in 18th paragraph.)

Oct. 13 (Bloomberg) -- Bankers may have to give up bonuses and shareholders forgo dividends at lenders that need capital injections to meet tougher European Union standards.

The restrictions on compensation and dividends and increased capital reserves were part of European Commission President Jose Barroso’s plans announced yesterday to recapitalize banks in response to the region’s debt crisis. The Association of German Banks said the EU proposal doesn’t solve any underlying problems and makes it even harder to raise capital from private sources.

“Banning dividend payments would be counterproductive, as it would make capital increases even more difficult,” Michael Kemmer, head of the German banking group, said in an e-mailed statement.

An Oct. 23 summit of euro leaders looms as a deadline for a breakthrough in combating the crisis, which has driven Greece toward default and threatened the survival of the 17-nation currency. The EU’s move comes after stress tests on banks in July showed that most lenders had enough capital to withstand a recession. The tests were criticized for not taking into account the possibility of losses on sovereign bonds.

The EU’s top banking regulator, the European Banking Authority, is considering setting a temporary capital benchmark of 9 percent as part of Barroso’s plan, a person familiar with the talks said yesterday. The regulator used a benchmark of 5 percent for its formal stress tests on EU bank capital in July.

‘Quickly as Possible’

Banks that can’t meet the new standards should present plans to bolster their reserves as “quickly as possible,” Barroso said in Brussels yesterday. Until then, they “should be prevented paying dividends and bonuses by supervisors.”

The extra capital requirements would be measured using a definition of core reserves that was developed by the Basel Committee on Banking Supervision, a global group of regulators and central bankers that agrees on minimal capital levels. Those rules wouldn’t normally apply until 2015.

The definition of capital is tougher than some EU jurisdictions currently use, James Babicz, head of risk at business analytics company SAS U.K., said in a telephone interview.

“That kind of capital refers to retained earnings and shareholder equity,” Babicz said. “The German landesbanken and building societies will find that a challenge as they don’t have shareholders. They have members.”

‘Sidestep’ Pay Restrictions

If the dividend issue will be problematic, banks may find ways to keep paying their best employees.

“The bonus thing will simply be sidestepped,” Bob Penn, a financial regulation lawyer at Allen & Overy LLP in London, said in a telephone interview. “Banks will fear their senior talented staff will walk out the door and offer them a fixed salary rise.”

Under a 9 percent core Tier 1 ratio and a stress test that marked sovereign holdings to market prices, Italy’s UniCredit SpA would require about 58 billion euros and Royal of Scotland Group Plc 18.8 billion euros, according to estimates compiled by Roger Francis, a London-based analyst at Mizuho Securities.

In all, European banks would require 339 billion euros of capital, he said.

“This will go down very poorly among the underperforming banks,” Penn said. “It could put them into a spiral whereby the talented people leave, making it harder for the bank to recover.”

RBS has already written down the value of its Greek bonds by 50 percent “leaving a residual 0.7 billion-pound exposure,” Ian Gordon, a banking analyst at Evolution Securities Ltd., said Oct. 7 in a research note. “RBS has no need to raise capital.”

Private Capital

Lenders should turn to private sources of capital first, Barroso said.

“Banks are trading well under book value,” Penn said. “If you’re a shareholder, why would you invest more capital?”

The EBA has asked lenders for information on the value of sovereign debt holdings in their “held to maturity and loans and receivables portfolios,” as part of the review, according to a data template seen by Bloomberg News. Lenders’ holdings of government bonds will be valued more closely to their current market price than they were during the stress tests, the person familiar said, who declined to be identified because the talks are private.

European bank stocks dropped today, with the 46-member Bloomberg Europe Banks and Financial Services Index falling 3.1 percent at 2:50 p.m. London time.

--Editors: Anthony Aarons, Steve Bailey

To contact the reporters on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net; Jim Brunsden in Brussels at jbrunsden@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.


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