The European Parliament’s Economic Affairs Committee passed today two resolutions, calling for legislation on remuneration in the EU financial service sector and on the management of cross-border banking crises.
These resolutions lend further weight to Parliament’s calls to transfer more powers to EU level, as the only way to deal effectively with the EU’s highly-interdependent economy and prevent further financial meltdowns and taxpayer bailouts. Both resolutions call on the Commission to draw up legislative proposals that go beyond the current model of recommendations and loose co-ordination, which had only a limited impact in controlling the build-up of risk.
The first resolution calls for binding rules to regulate remuneration in the financial services sector and obligatory disclosure of directors’ pay in all companies traded on stock exchanges.
The second, on cross-border crisis management in the banking sector, advocates establishing an EU crisis management framework characterised by harmonisation, very tight co-ordination, and ultimately the development of an EU banking company law with a harmonised EU insolvency regime.
Real rules and transparency for pay
The resolution on remuneration policies in the financial sector and remuneration of directors of listed companies argues that tougher measures are needed to reduce incentives to take risks significantly and avoid the need for taxpayers to pick up the costs.
To achieve this, the resolution asks the Commission to adopt strong binding principles on remuneration policies in the financial sector, which would go further than what can be provided for through the capital requirements directives. Listed companies whose directors’ remuneration policy does not comply with these principles would be required to explain their reasons.
The resolution goes into the corporate governance systems needed to develop sound remuneration policies, including stronger shareholder control of salaries of directors in listed companies. It also advocates an effective alignment of compensation with prudent risk-taking, remuneration oversight powers for supervisors, and bonus limits, to ensure a balance between the fixed and variable parts of a pay packet.
Tighter co-ordination and planning
The key aim of the resolution on banking crisis management is to set up a structure to ensure that crises are resolved earlier and avoid rushed, weekend bank bailouts costing the taxpayer hundreds of billions of Euros. The growing size, complexity and interconnectedness of banks means that such a system must be established at European level, says the resolution.
The crisis management framework proposed by the resolution would, in the event of a crisis, preserve financial stability, minimise the cost to taxpayers, preserve basic banking services and protect depositors. It would also encourage banking sector players to act more responsibly.
The proposed framework would provide a common minimum set of rules, foster the convergence of national resolution and insolvency laws, and ultimately establish an EU resolution and insolvency regime. It would grant more crisis management powers to supervisory authorities, including the powers to wind up a bank or impose a total or partial sale. Considerable coordination powers would be vested in the nascent European Banking Authority (EBA).
A “Risk Dashboard”, based on a set of indicators to be designed by the Commission, is also proposed, with a view to rating the risk levels of individual banks and providing early warning of possible instability. Each bank would be required to have its own “resolution plan” which would detail the steps to be taken should it run into difficulties, so as to avoid rushed decisions.
Finally, the framework would include an EU financial stability fund to preserve banking stability in difficult times, and also a resolution unit within the EBA in charge of restructuring cross-border systemic banks which run into difficulties.
