European regulators talk tough over bank stress tests

 

By Jill Treanor, Thursday, 8 July 2010

 

tried to demonstrate that their health checks on the banking sector were severe enough by revealing that they were assuming a worsening of market conditions during May’s sovereign debt crisis.

 

But while the Committee of European Bank Supervisors named the 91 banks subjected to stress tests – citing HSBC, Barclays, Lloyds Banking Group and Royal Bank of Scotland in Britain – it failed to give precise details of the scenarios being used. Banking experts noted that Standard Chartered had been omitted from the list.

 

The regulators are testing their banks to check they have enough capital to withstand a two-year scenario that assumes a three percentage point drop in GDP for the EU compared with official forecasts. But, while revealing that the worst-case scenarios were being tailor-made for each country, it provided no further detail in a move that may frustrate investors seeking more comfort that the stress tests are severe enough. CEBS described the “sovereign risk shock” as being a deterioration worse than the one that occurred in May but provided no specifics on the assumed price of government debt. CEBS pledged that bank-by-bank results of the tests would be published on 23 July.

 

As markets remained concerned about whether stress tests on banks were severe enough, European legislators reached agreement on clamping down on bankers’ bonuses.

 

Sharon Bowles, Liberal Democrat MEP, heralded the legislation as ensuring there would be “no more Fred Goodwins”, a reference to the former chief executive of RBS who walked away with a £600,000 a year pension – later reduced – even though the bank was bailed out by the taxpayer.Some MEPs from Ukip and the BNP voted against the new laws which were voted through the European Parliament by 625 in favour to 28 against and 37 abstentions.

 

While Michel Barnier, European financial services commissioner, heralded the new rules as “curbing unsound remuneration practices in banks”, it is not yet clear how they will be implemented in the UK as each country has leeway over how to adopt them.

 

The FSA, whose remuneration code currently covers just 27 financial firms, was continuing to review the text of the legislation. The City regulator has already pledged to consult on the code, introduced last year after pay practices at banks were exposed during the financial crisis, later this year.

 

The EU regards its bonus rules as the toughest yet imposed anywhere in the world as they essentially allow bankers to receive only 20% to 30% of their bonuses in cash with the rest paid in shares and deferred for up to five years.

 

Nicholas Stretch, partner at law firm CMA Cameron McKenna, seized upon the flexibility granted to national regulators.

 

“The FSA was already planning to review its Remuneration Code this summer. The EU legislation may force its hand, but there is still considerable scope for UK discretion and we hope the regulator will be level-headed in applying rules in areas where there is little element of risk and will strip out the politics in the European legislation,” Stretch said.

 

Vicky Ford MEP, Conservative economic and monetary affairs spokesman, also urged governments not to impose the rules in a “heavy-handed way”.

 

“These reforms are aimed at bonuses for frontline risk-takers in banks not at the graduate trainee or high street branch clerks,” Ford said. “These reforms will bring a culture of responsibility rather than recklessness,” she added.

 

(Source:Guardian.co.uk)

 

 

 

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