Financial Regulatory Forum

G20 heads for crackdown on bank bonuses

By Reuters Staff
September 15, 2009

By Huw Jones and Anna Willard
PARIS, Sept 15 (Reuters) – Banks with low levels of capital will not be able to offer large bonuses under guidelines the G20 is set to discuss this month, the Financial Stability Board said on Tuesday.

“It’s important that firms conserve profits so they can rebuild capital and support lending,” FSB Chairman Mario Draghi told a news conference.

“We will have a link between total bonus pool and the firm’s overall performance,” Draghi said.

An FSB official said the board will issue detailed guidelines at the G20 summit this month in the United States on how financial firms should structure pay packets.

French President Nicolas Sarkozy and German Chancellor, Angela Merkel want limits on the actual level of bonuses amid public anger over huge payouts at a time when vast sums of taxpayer cash are still propping up the sector.

“We must make sure that the bankers of this world can never again get up to such things at our cost,” Merkel said on Tuesday.

She vowed to push for the adoption of “clear rules” to prevent bankers from burdening the economy again when she travels to Pittsburgh for the G20 summit on Sept. 24-25.

The FSB signaled limits would be imposed indirectly by giving undercapitalised banks little wiggle room to make huge payouts.

“We are addressing the need for firms to retain resources,” the official said.

“That affects share buybacks, payout rates, bonuses. That implies limitations on the rate of compensation pool in relation to total revenue of the firm for a period of time until the capital resources have been restored,” the official added.

The board, made up of central bankers, regulators and finance ministry officials from the G20 group of industrial and emerging market countries, was meeting on the anniversary of the Lehman Brothers investment bank crash which brought the global financial system to its knees.

The FSB is responsible for coordinating the implementation of G20 pledges to toughen up financial regulation.

The G20 adopted high-level principles in April to stop remuneration packages from encouraging traders and bankers to take excessive short-term risks that could destabilise a firm.

The FSB will present guidelines in Pittsburgh to detail how banks should structure packages to avoid reckless risk taking.

The guidelines will cover disclosure of pay levels, clawing back unmerited bonuses, deferral periods, vesting periods, options and shares, and effective and independent oversight.

Draghi said markets were getting back to normal and the FSB believes this is a good time to rebuild capital but there were still some challenges, such as the weak supply of credit, especially to smaller businesses.

But there was also a need to take great care on phasing in the new, higher capital requirements that banks must comply with otherwise they could stop lending, Draghi added.

STRONGER VOICE
The G20 summit is also set to discuss reforming the governance of the International Monetary Fund and the World Bank in a bid to give a stronger voice to developing countries like China, Brazil and India.

China said on Tuesday the G20 summit should throw its support behind an increased role for Beijing and other developing countries in the IMF and World Bank.

In a briefing to lay out China’s positions, assistant central bank governor Guo Qingping said the summit should “set further specific goals for transferring voting rights from developed countries to developing countries” in the IMF and World Bank, including on timing.

Zhu Guangyao, an assistant finance minister, said at the same briefing that China expects voting rights in both institutions eventually to be equally distributed between developed and developing countries.

Brazil, Russia, India and China this month proposed a 7 percent shift in IMF quotas in favour of developing countries, more than the 5 percent the United States is proposing.

The G20 summit is also likely to reiterate that it was too early to end the huge taxpayer support for financial sectors and banks in several countries.

The IMF said on Tuesday that unwinding the large amount
of government support for the financial system should be gradual and authorities should take care not to disrupt markets or shake investor confidence.

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