Bloomberg News

EU Targets Bank Bonuses That Fly in the Face of ‘Morality’

January 31, 2012

(Updates with comment from European Banking Authority in 11th paragraph.)

Jan. 30 (Bloomberg) -- Michel Barnier, the European Union’s financial-services commissioner, said he may propose tougher rules on banker bonuses that go against “all reason, common sense and morality.”

Barnier, who’s responsible for proposing laws that govern banks across the 27-nation EU, warned that he’ll seek extra legislation by the end of this year if lenders “carry on paying excessive bonuses.” Ideas being “worked on” include limiting the gap between minimum and maximum pay in a bank and also setting a ratio between fixed and variable pay, he said at a European Parliament hearing in Brussels today.

Labor leaders and politicians have criticized some bank bonus awards as out of touch with economic reality. Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester waived his 963,000-pound ($1.5 million) bonus after the U.K.’s opposition Labour Party said it would ask the national Parliament to vote on the award.

The European Commission, the EU’s executive arm, will be “extremely vigilant” in monitoring this year’s bonus round, Barnier said.

Pay Rules

The EU adopted pay rules for banks in 2010 that included limiting immediate cash payouts as a proportion of total bonus awards, in an effort to prevent payouts that could encourage irresponsible risk taking.

“The commission won’t hesitate to reinforce the existing legislative framework if banks continue to pay excessive bonuses or if major problems are identified in the application of the rules,” he said.

The EU may seek to increase the role a bank’s shareholders play in setting pay awards, he said.

Barnier today urged other regions to follow the EU’s efforts to rein in excessive pay.

“I hope we won’t remain alone in the vanguard,” Barnier said. He said he was also prepared to take legal action against any EU nations that fail to implement the bloc’s rules.

Banks in Europe haven’t done enough to adapt their pay structures to discourage excessive risk taking, Isabelle Vaillant, a director at the European Banking Authority, said at the Brussels hearing.

‘Too Little’

“Too little has been done,” she said. Some banks may still be applying pay policies that “incentivize their staff” to take “big risks,” she said. The London-based EBA will publish guidelines in the next two weeks on the collection of data relating to bank pay, Vaillant said.

Global regulators in the Financial Stability Board said last month they will be vigilant in policing the board’s international guidelines on bank bonuses that were published in 2009.

The FSB will report to the Group of 20 nations in June on how well nations are applying the guidelines, Simonetta Iannotti, an official at the board, told today’s hearing.

The CEO of Britain’s second-biggest government-aided bank, Antonio Horta-Osorio of Lloyds Banking Group Plc, said on Jan. 13 he won’t take a 2011 bonus following his nine-week absence for exhaustion. The payment could have been as much as 2.39 million pounds, according to company filings.

--Editors: Peter Chapman, Anthony Aarons

To contact the reporter on this story: 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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