Markets & Finance

Regulator: Bonuses, Dividends May Be Limited at Weak Banks


The Basel Committee on Banking Supervision also said banks should increase the quality of the capital they hold to cope with losses

(Bloomberg)—Global regulators urged national authorities to limit bonus and dividend payments by banks with weakened capital safety nets as part of proposals to reduce risks to the financial system.

Banks should increase the quality of the capital they hold to cope with losses, the Basel Committee on Banking Supervision said in a report on bank capital and liquidity published today. Banks with depleted capital buffers shouldn't use predictions of recovery to justify generous dividends to employees and investors, the panel said.

Global regulators have been wrestling with plans to increase bank supervision following the worst economic crisis since World War II. The Group of 20 Nations agreed in April that banks should be required to hold more and better quality capital to reduce risks to the financial system.

"If it's way to force banks to build capital buffers then we've said it's a sensible way to build confidence in the financial system," said Erik Berggren, banking analyst at Brussels-based advocacy group BusinessEurope, by telephone today. "It's important the recovery is not hindered; we need banks to give credit."

Core Capital

Banks' core capital should exclude stock or instruments that may require lenders to make payments to third parties, as these could reduce reserves needed for meeting losses, the committee said. Banks should have an "appropriate" period to replace such instruments.

The Basel Committee, which coordinates banking supervision among 27 member countries, will gauge the effects of rule changes. Its recommendations are generally adopted by most national regulators.

"It's not acceptable for banks which have depleted their capital buffers to try and use the distribution of capital as a way to signal their financial strength," the committee's statement said. "The proposed framework will reduce the discretion of banks which have depleted their capital buffers to further reduce them through generous distributions of earnings."

The group won't make final decisions until the end of 2010, as banks repair balance sheets weakened by $1.71 trillion of losses and writedowns during the credit crisis. Regulators in Europe have told banks to hold more government bonds to improve liquidity.

Negotiations

The Basel Committee will survey banks in the first half of 2010 in its assessment of possible consequences of the changes. It will also judge an appropriate leverage ratio, after banks borrowing at low rates in the wholesale market couldn't fund their loans and investments when credit froze.

"The Basel Committee will only take decisions after it has completed the necessary impact study," Sabine Lautenschlaeger, a spokeswoman for Germany's banking regulator said in an e- mailed statement. "It's impossible to decide on so many rules, without being able to estimate what effects they have on the market."

The Bloomberg Europe Banks and Financial Services Index, which tracks 64 financial companies, declined 2 percent, the most in a more than a week. Dublin-based Bank of Ireland fell the most, losing 5.4 percent, followed by Commerzbank AG, which retreated 4.4 percent, the most in more than a month.

Liquidity Standard

To meet stress situations of at least 30 days banks should keep adequate amounts of highly liquid assets, the Basel Committee said, echoing measures proposed by the British and European regulators earlier this year. The assets should be simple to value and wouldn't have to be sold at fire-sale discounts during times of stress.

The Committee of European Banking Supervisors told European banks Dec. 9 that they should use highly liquid assets to build liquidity buffers to withstand cash shortages of at least a week as long as a month.

The Financial Services Authority said financial companies in the U.K. may have to buy as much as 110 billion pounds of government bonds to meet its liquidity rules. Britain nationalized Northern Rock Plc last year, after the bank became the first U.K. lender in 140 years to suffer a run on its deposits after it asked the Bank of England for emergency loans in September 2007.

To contact the reporters on this story: Joseph Heaven in Zurich at jheaven1@bloomberg.net; Christian Vits at cvits@bloomberg.net


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