REMUNERATION RULES:BANKERS' BONUSES will have to be linked to the long-term performance of their institutions once new remuneration rules proposed by the Central Bank come into force.
The Central Bank will also have the power to suspend bank directors and senior management if investigating their “fitness and probity” under a new regime provided for in the Central Bank Reform Bill 2010.
In a report setting out a new approach to banking supervision, the Central Bank said remuneration arrangements in the banking sector had focused on balance sheet growth rather than the stability of the business. Directors, management and staff were rewarded for short-term profitability, which incentivised the pursuit of riskier activities.
“Clearly, remuneration sits at the centre of this crisis, not just here but internationally, in the sense that bankers got paid today for risks that were taken way into the future. And in that situation, what is the incentive for managing those future risks?” asked Jonathan McMahon, assistant director general of financial institutions supervision at the Central Bank.
In September, the Central Bank will issue a consultation paper on remuneration requirements for the financial services industry. These requirements will include an obligation to link remuneration policies to risk tolerance and the long-term interest of the institution.
The Central Bank plans to finalise and roll out these requirements by the first quarter of 2011.
As part of its supervisory work during 2010, it intends to “drill down” into the remuneration policies of banks
It will also scrutinise the way in which banks incentivise asset acquisition versus funding risk management through their remuneration practices and will report its findings in November.
It has proposed new corporate governance requirements, such as an obligation for banks and insurance companies to review the composition of their boards at least once every three years.
A vetting process is being rolled out to assess the fitness and probity of people being appointed at senior levels within domestic banks.
Individual directors of significant institutions will be periodically interviewed to assess their understanding of key risks. The overall quality of boards will also be reviewed.
The regulation of credit risk must also be overhauled. Institutions with more concentrated risks ie, those exposed to sectors with a common risk factor, will be required to hold more capital.