Thursday, May 3, 2012

Trying to avoid voter backlash, EU lawmakers recommend exclude earnings on loans from ECB from banker bonuses

Bloomberg reports that EU lawmakers are looking into excluding earnings from low cost ECB loans from banker bonuses.

This simply highlights how truly flawed adopting the Japanese model for handling a bank solvency led financial crisis and protecting bank book capital levels is.

If banks were required to recognize all their losses on and off their balance sheets, they would have significant negative book capital levels.

It is common sense that when a bank has a negative book capital level, it should not pay any bonuses in cash, but instead in common stock.  This serves to accelerate the rebuilding of bank book capital levels.

Since bonuses will be paid in common stock, shareholders have an incentive to minimize the dilutive effect of this common stock issuance.  As a result, they will take the step voluntarily of excluding from banker bonuses and earnings attributed to borrowing from the ECB.

From the Bloomberg article,

Banks may have to disclose profits from carry trades derived from 1 trillion euros ($1.3 trillion) in European Central Bank loans and exclude the money from bonus pools, under draft proposals from European Union lawmakers. 
Profit from carry trades, where investors borrow money at a low interest rate to buy higher yielding securities, “should not count toward computation of remuneration and bonus pools” at banks, under plans being weighed by European Union lawmakers, according to a document obtained by Bloomberg News.... 
Banks should disclose “profit made from the ECB LTRO through carry trades” according to proposed amendments from members of the EU parliament contained in the document. 
Lawmakers have proposed measures to shake up bankers’ pay in the framework, which would implement international capital standards, known as Basel III, in the European Union.... 
Among the amendments sought by members of the parliament is one by Othmar Karas, the Austrian Christian Democrat lawmaker leading work on the draft rules in the assembly, to ban bonuses that exceed a banker’s salary. 

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