Financial Regulatory Forum

Largest German banks to enforce bonus rules in 2009

December 10, 2009

CEO of Deutsche Bank Josef Ackermann holds his speech during the Euro Finance Week in Frankfurt November 20, 2009. REUTERS/Ralph Orlowski By Philipp Halstrick and Edward Taylor

FRANKFURT, Dec 10 (Reuters) – Germany’s largest financial companies have agreed to enforce the Group of 20 recommendations on bonus rules in 2009, a year before they must, people familiar with the matter said on Thursday.

German regulators had demanded that banks and insurers such as Deutsche Bank adopt the recommendations from 2010.

The G20 rules which were drawn up in the wake of the financial crisis require bonus payouts to be deferred over time, a move designed to discourage short-term risk taking.

Josef Ackermann, chief executive of Deutsche Bank, later told reporters in Berlin that 11 of the country’s top banks and insurers had signed a declaration agreeing to this at the end of last week, and wanted to apply them for 2009.

“We said to ourselves the best thing would be if we officially undertook an initiative,” Ackermann said.

He added that Deutsche was prepared to contribute 300 million euros toward a fund German banks have been considering to help supply small and medium sized firms with credit.

Ackermann was speaking at an event with German Finance Minister Wolfgang Schaeuble, who said he was pleased banks had taken it upon themselves, adding that the state would supplement the drive with its own steps next year.

“We need compensation structures to be sustainable,” said Schaeuble, a member of Chancellor Angela Merkel’s conservatives.

Germany’s BDB banking organisation welcomed the regulatory campaign to crimp excessive bonuses for risky strategies.

“Skewing competition can only be avoided if comparable principles for compensation apply for all global financial centres as well as at a national level,” it said, calling on German regulators to push for unified rules.

Separately, the German association of savings banks and landesbanks also hailed the bonus guidelines.

“It is good that the necessary consequences have been drawn from corporate strategies and compensation systems that in part were too focused on the short term,” it said, while stressing that savings banks had not paid excessive salaries or bonuses.

BONUS CRITICISM

The voluntary agreement among German lenders comes amid criticism of a freewheeling bonus culture and pressure from regulators, central banks and governments who are working to prevent banks from posing a risk to the financial system.

British Prime Minister Gordon Brown and French President Nicolas Sarkozy have called for an exceptional tax on bonuses.

Britain has drawn up plans for a tax on banks paying bonuses above 25,000 pounds ($40,840).

Though there is broad consensus that risky behaviour by bankers was a key cause of the crisis, regulators have struggled to agree on what role bonuses played in destabilising the system, or on how to regulate or cap bonuses.

Critics point out that regulating bonuses won’t stop banks from maintaining overall remuneration at a high level by raising fixed salaries or pension allowances.

And bankers have pointed out that regulating bonuses may not make the financial system safer since companies that paid the highest bonuses were not always among those that failed.

U.K. bank Northern Rock and Germany’s IKB and Hypo Real Estate paid smaller bonuses than the likes of healthier rivals such as Goldman Sachs, they said.

But banks and regulators have reached a broad consensus to rein in incentives that discourage short-term profits at the expense of long-term financial stability.

Unicredit, Morgan Stanley, UBS, Commerzbank and Allianz have revised their bonus systems to include claw-back options and deferred payouts.

Deutsche’s Ackermann has previously defended the need to pay big bonuses as a way to compete in the global “war for talent.”

The U.S. Federal Reserve has issued guidelines on pay and the Obama administration’s “pay czar” has slashed remuneration at several U.S financial groups that got taxpayer money.

Banks such as Citigroup already are forging new employment contracts that let them void compensation agreements if they are challenged by the U.S. government.

Ironically, some of the regulatory changes introduced to stabilise the financial system will have helped boost bonuses.

Steps such as letting banks delay booking losses on toxic assets, giving them readier access to central bank funding, easing rules on collateral and banning short-selling of bank shares have improved the metrics on which bonuses are based. (Editing by Carol Bishopric) ((Additional reporting by Gernot Heller; Reuters Messaging: dave.graham.reuters.com@reuters.net +49 30 2888 5217))

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