Banks will face limits on the total amount they pay their staff in bonuses until they meet more demanding capital requirements, an international body of regulators and central bankers agreed on Tuesday.
“It’s important that firms conserve profits so they can rebuild capital and support lending,” Mario Draghi, the governor of the Bank of Italy and chairman of the FSB, said after a meeting in Paris. “We will have a link between total bonus pool and the firm’s overall performance.”
Finance ministers from G20 countries last week agreed to implement tighter capital requirements. The G20 ministers also gave the FSB the task of drafting rules to regulate bonuses.
Mr Draghi, a former managing director of Goldman Sachs, said the new capital requirements – which he described as the “single most important project we have” – would be phased in progressively.
The idea of limiting bonuses while banks build up their capital resources to meet the new standard could also be a way of bridging the gulf between French calls for overall limits on bonuses paid as a share of profits and US resistance to any such permanent ceiling.
Limits on bonuses while tightening capital requirements would create few objections from the strongest banks, particularly US ones, that have already raised capital and are closest to complying with the new capital standards. It is these banks that have made some of the largest provisions for bonuses this year, triggering a furore on both sides of the Atlantic.
An FSB official said it was “too early to say” whether the FSB would recommend specific temporary limits to G20 leaders. But he added: “They need to build capital levels in anticipation of higher capital requirements. And in this environment, it is appropriate for supervisors to restrict dividend payments, share buy-backs and compensation rates.”
Mr Draghi said the FSB would present G20 leaders with “specific” guidelines on bonuses to ensure regulation was “full and consistent across countries”.
These would set a benchmark for governance, disclosure and structure. There would be specific proposals on board oversight, on links between bonus pools and overall performance, on the proportion and length of deferred payments, and on the vesting period for parts of bonuses paid in shares.