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EC drafts new rules on pay

THE European Commission (EC) unveiled new measures to crack down on bank bonuses yesterday, with the publication of a draft law promising to penalise banks whose pay policies encourage risk.<br /><br />The latest planned legislation will concentrate on executive pay, seeking to establish a globally-applied mix of variable and fixed pay that best discourages risk-taking.<br /><br />&ldquo;It is true that employment contracts are likely to be renegotiated and that the fixed component awarded could be higher,&rdquo; the EC said.<br /><br />But the new laws will stop short of allowing regulators to determine levels of pay at individual institutions.<br /><br />The new requirements, which the EC plans to implement from 2011, would sign into European law changes that are already being made to the Basel II global framework on capital requirements.<br /><br />The Basel Committee on Banking Supervision yesterday published reforms to its rules on capital, which it says will form the basis of the EU laws.<br /><br />The EC proposal will also tighten up capital requirements and require banks to disclose their holding in securities.<br /><br />Efforts to legislate against risk at financial institutions follow April&rsquo;s G20 summit in London, at which the world&rsquo;s foremost political leaders agreed that banks should hold substantial counter-cyclical capital buffers to protect them against future downturns.<br /><br />The EC is expected to follow up its latest efforts to curb risk with a fresh round of legislation later this year, dealing with liquidity requirements, leverage caps and counter-cyclical capital requirements.