By Emma Ross-Thomas and Rainer Buergin
Sept. 3 (Bloomberg) -- European Union finance ministers agreed to push for tighter rules on bank bonuses as they prepared a common stance on overhauling the financial system before a summit of the Group of 20 nations.
Authorities need “stronger muscles and sharper teeth,” Swedish Finance Minister Anders Borg, whose nation currently holds the rotating EU presidency, told a press conference yesterday in Brussels after leading a meeting of European finance chiefs. “The bonus culture must come to an end.”
German Chancellor Angela Merkel and French President Nicolas Sarkozy said on Aug. 31 that they would press fellow G- 20 leaders to regulate bank bonuses as well as require lenders to set aside more capital to avoid a repeat of the financial crisis that has caused global writedowns and losses of $1.6 trillion. G-20 finance ministers meet in London on Sept. 4-5 before a Sept. 24-25 summit of leaders in Pittsburgh.
French Finance Minister Christine Lagarde said she is optimistic that all 27 EU governments will support proposals she brought to yesterday’s meeting to curb bonus pay at banks. She said the options included an outright cap on bonuses, limiting them as a percentage of total pay, and taxing them.
“In the hours and days to come, all the finance ministers will understand the suitability of the French position and will rally to it, and in a very formal way that may surprise you,” Lagarde said.
Geithner’s View
In a briefing in Washington yesterday, U.S. Treasury Secretary Timothy Geithner said reining in executive compensation is “a critical part of our broader reform agenda.” He said the U.S. has proposed “pretty comprehensive reforms” to give shareholders more control over pay policies and also give managers better incentives to act in the best long-term interest of their banks.
“If you look at what’s happening across Europe, like in many of these areas, there’s a lot in common in terms of basic strategy,” Geithner said. He declined to comment on specific changes sought by his counterparts, saying he had not yet had detailed discussions on the policy proposals.
U.K. Prime Minister Gordon Brown sees a cap on bonuses as difficult to enforce, the Financial Times reported earlier this week, citing an interview. Chancellor of the Exchequer Alistair Darling, who did not attend the meeting in Brussels, later this week will put forward a plan to the G-20 nations through the Financial Stability Board that the U.K. already plans to adopt.
Bonus Limits
Darling will call on countries to force banks to discourage excessive risk-taking by holding back bonuses for as many as five years and make risky lenders hold more capital. He also wants top bankers’ bonuses to be made public. The U.K. was represented at yesterday’s meeting by Economic Secretary Ian Pearson.
“The British were more positive than could be deducted from news reports in the past week,” Dutch Finance Minister Wouter Bos said. Earlier, in response to a question about the U.K.’s efforts to curb bonuses, Bos said he sees “some major countries moving in the right direction but not every country is moving yet as quickly as they possibly could.”
A U.K. official said the government in London “is committed to ending the short-term bonus culture and pay practices that could threaten the stability of the financial system. We need to see measures that are global in scope,” said the official, who spoke on condition of anonymity.
German Deputy Finance Minister Joerg Asmussen said the U.K. endorsed the French proposals “in principle.” The EU wants “a clear relationship between bonus and performance.” Bonuses will be more transparent and compensation may be deferred, he said.
G-20 Consensus
“Now we have to find a common G-20 position in London,” Asmussen said. “It won’t be enough for Europe to take a position.”
“This will be a very difficult thing to get agreement on and implemented across a wide range of countries,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “Experience shows it needs to be sorted out on a country-by-country basis.”
Sarkozy said on Aug. 25 that France won’t hire banks that refuse to accept government limits on compensation, and executives from French institutions including BNP Paribas SA and Societe Generale SA promised to defer two-thirds of bonus payments for three years and to pay out one-third in shares.
“I don’t think the rest of the world will agree to those plans and efforts,” Otto Waser, chief investment officer at R&A Research & Asset Management AG said in a Bloomberg Television interview on Aug. 27. “Talents are just going to leave the industry and do their business elsewhere, so I don’t think it’s a workable avenue,” he said of the French proposals.
European Banks
Amid concern over policy makers’ demands that banks also set aside more capital to prevent future crises, the cost of protecting bank bonds from default rose in Europe yesterday by the most since May. The Dow Jones Stoxx 600 Banks Index dropped 1.7 percent yesterday in London, a third straight day of declines.
Merkel, who has said the bonus system “quite rightly drives a lot of people up the wall,” joined forces with Sarkozy ahead of the last G-20 summit in London in April to demand steps to control executive pay, plus rules governing hedge funds and a new “architecture” for financial markets. Merkel, who faces elections on Sept. 27, has since voiced concern that governments may backslide on past G-20 commitments as the recession eases.
The euro-area economy barely contracted in the second quarter, with Germany and France returning to growth after the European Central Bank injected billions of euros into markets and governments offered consumers incentives to spend. World Bank President Robert Zoellick said yesterday the chances of a “truly global recovery” have increased because of China’s expansion and signs that other economies are stabilizing.
Europe’s Recovery
As evidence mounts that the worst of Europe’s recession has passed, Bos said yesterday that policy makers should start thinking about how to unwind government stimulus measures. Other policy makers joined calls from the International Monetary Fund’s No. 2 official, John Lipsky, for the exit to be coordinated.
German Finance Minister Peer Steinbrueck, absent from yesterday’s meeting in Brussels, told his counterparts in a letter last month that failure to align exit strategies risked “distortions of competition,” after governments extended more than $2 trillion in fiscal packages and help for banks such as Citigroup Inc. and Royal Bank of Scotland Group Plc.
“I think the exit strategy from this crisis should be coordinated at the European level and of course also at a global level. We will discuss this at the next G-20 in London,” EU Monetary Affairs Commissioner Joaquin Almunia said yesterday.
The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the EU.
To contact the reporters on this story: Emma Ross-Thomas in Brussels at erossthomas@bloomberg.net; Rainer Buergin in Brussels at rbuergin1@bloomberg.net.
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