Banks should pay out bonuses in a way which helps them build up capital reserves and moves risk from taxpayers to those benefiting from the payouts, according to Sharon Bowles, senior Liberal Democrat MEP.
Last year, the EU published rules in the Capital Requirements Directive (CRD) 3 which mean banks pay between 40 and 60% of bonuses in contingent capital or shares deferred for at least three to five years.
Contingent capital, or Cocos, are bonds which convert into equity in times of stress and so are included in a bank’s capital reserve. They also mean those who hold the bonds are exposed to the risk.
Bowles, the economic and monetary affairs committee chair, welcomes today’s proposals from Barclays to pay a large portion of the bank’s bonuses in Cocos, and warned other banks who did not want to follow suit.
She says: “Barclays, it seems, has got the right idea, having announced a proposal to pay bonuses in contingent convertible bonds. The banks that do not want to follow suit would do well to remember their decision when pleading over upcoming capital charges in Basel III which we will be looking at for the EU later this year.” (article continues below)
Despite having the choice of shares or contingent capital under CRD 3, Bowles says the Cocos are her preferred option.
She says: “The advantage of paying bonuses in contingent capital over shares is that banks can build up their capital base at a time when they are being forced to build capital—a situation banks claim is making it harder to lend to SMEs.
“Contingent capital is also a better way of realigning risks with incentives—if the bank faces heavy losses it will be the bankers responsible, not taxpayers, which take the financial hit first, thereby putting an end to the reward of failure.”