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EU says banks could be fined for bonuses

EUROPEAN financial supervisors would be able to fine banks that give bonuses encouraging staff to take excessive risks under new rules proposed by the European Commission yesterday.

The EU executive arm also suggested new capital requirements for how much banks should set aside to cover high-risk investments, including their trading book and resecuritizations that combine, slice up and repackage investments based on loans.

The new rules are not likely to take effect until late 2011 and will need the backing of the European Parliament and the European Union's 27 governments.

The EU said this would be too late to address the current financial crisis but the proposals could strengthen market confidence and banks' financial health.

The EU's top financial services official, Charlie McCreevy, said the EU was trying "to put an end to the culture of excessive risk-taking for short-term success at the expense of long-term profitability and sound risk management."

Regulators want payoffs for staff quitting banks early to reflect performance over time, saying they "should be designed in a way that does not reward failure."

National supervisors would monitor banks' policies on severance pay and "may impose sanctions such as fines" in extreme cases where banking pay encourages risky behavior, they said. Fines would be set by each EU country and could vary widely.

The EU said these recommendations may see banks renegotiating employment contracts and raising basic pay and that it would welcome this.

Certain staff

"A high-fixed component should cut excessive risk-taking by removing perverse incentives for an individual to raise his or her total remuneration by boosting short-term financial results," it said.

It said the rules would only cover staff whose work directly affects the risk profile of the company - board members as well as sales staff and traders.

Regulators also want to extend capital requirement rules to cover risks stemming from the investments that a bank trades continuously - its trading book - and resecuritizations that bundle up complex investments based on assets that now find few buyers.


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