Business Irish

Monday 19 August 2019

Europe's top regulator warns on bank bonuses

Worry: The ECB’s Andrea Enria believes bonus culture results in short-term gain only
Worry: The ECB’s Andrea Enria believes bonus culture results in short-term gain only

David Chance

The Eurozone's top financial regulator said many banks are just "ticking the boxes" on regulation and told a financial conference in Dublin that bankers' bonus schemes in many cases are still divorced from the long-term sustainability of banks.

The head of Europe's Single Supervisory Mechanism (SSM) Andrea Enria told the Federation of International Banks in Ireland conference that bonuses were still too often designed to maximise short-term gains, and that rules which deferred payments did not always work.

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The comments are in contrast to a letter this month from former Central Bank of Ireland Governor Philip Lane to Finance Minister Paschal Donohoe who backed the reintroduction of bank bonues, saying current restrictions risked the viability of banks.

Finance Minister Paschal Donohoe is currently considering whether the €500,000 a year pay cap at bailed out banks should be lifted and whether bonuses should be allowed again.

Italy's Andrea Enria is the Euro area's top financial regulator. He edged out Ireland's Sharon Donnery for the SSM post last year.

In Dublin yesterday Mr Enria urged caution, he stressed that banks were "not yet there" in changing the risk-taking culture that plunged the world into the financial crisis.

Asked whether it was appropriate for bonus caps to be lifted here, he said it was up to the Government "whether these legacy issues have been sufficiently dealt with".

Taxpayers ended up on the hook for €64bn as a result of the banking crisis and Ireland's debt is still among the highest in the world, while senior employees of bailed-out banks walked away with their wealth, much of it accumulated through bonuses, largely intact.

A push to end pay restrictions here has been led by largely State owned AIB, which has complained it is losing talent to financial institutions and tech firms not bound by pay caps. AIB had proposed rewarding top executives with deferred shares that were in part conditional on the state getting the remaining €21bn of the cost of its bailout back via share sales.

Minister Donohoe has a report by headhunters Korn Ferry on the issue but has not yet made a decision on whether to lift the caps.

A study by the Bank of England that was cited by Mr Enria showed that a bonus structure that rewards individuals proportionally to realised investment returns, but does not penalise negative returns, encouraged risk-taking; while a bonus cap and penalty clause claw-backs mitigated such risks.

Irish Independent

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