Wednesday 19 June 2019

Return of bankers' bonuses as Central Bank backs pay flexibility

Central Bank governor Philip Lane supports an end to caps. Picture: Damien Eagers
Central Bank governor Philip Lane supports an end to caps. Picture: Damien Eagers

David Chance

Central Bank governor Philip Lane has backed an to end to caps on bankers' bonuses in a letter to Finance Minister Paschal Donohoe.

A decision on whether to soften the rules, which were put in place after the financial crisis hit, is moving closer amid pressure from the Brexit process.

Bankers have long been calling for an end to the caps that limit bonuses and pay.

They were introduced in a bid to eliminate herd behaviour in banks, of the kind that nearly drove Ireland to the wall during the financial crash.

AIB, which is still majority owned by the State, has been the most vocal - saying that the restraints have damaged its ability to recruit and retain senior staff.

It cited more financial institutions moving here from London ahead of Brexit, increasing the demand for talent.

Now the Central Bank governor has added his voice in a letter to the Finance Minister.

"Against this background and taking account of the more stringent European remuneration guidelines now in place, we believe there may be merit in allowing more enhanced flexibility with respect to remuneration for such staff," he wrote.

Pay caps cover Bank of Ireland and PTSB as well as AIB, limiting salaries to €500,000 a year and imposing prohibitive taxes on any bonuses.

Professor Lane said a more flexible pay structure would also allow banks to reduce costs in a downturn.

Richard Pym, the chairman of AIB, has called for Ireland to "move on" from what he said was the hatred towards bankers for their role in the financial crisis.

But the issue is still a political hot potato as banks sell down their bad loan portfolios to so-called vulture funds.

He has also called for the State to cut its stake in AIB.

In his letter, Prof Lane wrote that there was still some way to go before Irish banks delivered a resilient and trustworthy financial sector.

"From a sustainability standpoint, the Irish domestic banks have returned to profitability , albeit at relatively subdued levels," he wrote.

"However, risks remain from both a prudential and conduct perspective."

He called for more diversity in hiring by the banks, saying this would help improve decision-making and reduce the risk of the kind of "groupthink" that contributed to risky lending.

A decade on from the start of the global financial crisis, the consensus among central banks internationally is that tough new rules have reduced the likelihood of a repeat of the kind of risky lending that led to the last bust.

Banks are also stronger and better capitalised than they were.

At the same time, there are concerns that some of the activity formerly undertaken by banks has moved to other areas of the financial system that are less tightly supervised.

Central banks across the globe have come under fire from critics who say that their policies of keeping interest rates at, or close to, zero has encouraged risky lending.

A major report on the state of financial regulation issued yesterday by Vox, which is part of the influential Centre for Economic Policy Research, said that today's regulations were unlikely to prevent the next financial crisis.

"We do not know where the next crisis will hit. But if the past is any predictor of the future, we can be sure that entities that perform the functions of banks, but are outside the regulatory perimeter, will play an important role," it said.

Irish Independent

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