Saturday, October 27, 2012

In a first, bank executives asked to give back bonuses when bank fails

In what appears to have been a first since the current global financial crisis began, executives at a high profile bank, in this case the Spanish bank Bankia, have been asked to give back their bonuses from the year prior to the bank's failing.

Up until now, banker bonuses have been protected at all costs.  Not only banker bonuses, but in the US, Treasury Secretary Tim Geithner also tried to protect the bonuses of the employees who worked in the area of AIG that effectively bankrupted that firm.

Asking the bankers to repay their bonuses is a huge policy shift.

Once banker bonuses are no longer protected at all costs, then the idea that bank book capital levels don't have to be protected at all costs becomes viable.

Once bank book capital levels don't have to be protect at all costs, banks can actually be required to recognize all the losses hidden on and off their balance sheet that they would ultimately realize if the excess debt went through the long process of default and bankruptcy.

Once banks recognize their losses on the excess debt in the financial system, the burden of servicing this debt is lifted from the real economy.  This allows the real economy to grow as capital that is being used to service the excess debt can instead be used to purchase goods and services.

With the real economy growing, monetary policies like quantitative easing and zero interest rates can be ended.  This in turn will stimulate further growth as savers will now receive a return on their savings.

As reported by the Guardian,

Top executives at Spain's giant nationalised Bankia are to be ordered to pay back last year's annual bonuses as the bank admits to having run up record-breaking losses of €7bn (£5.6bn) in the first three quarters of this year. 
The size of the losses, the biggest ever reported by a Spanish bank, was revealed on the same day that recession-hit Spain also saw unemployment rise to above 25%. Some southern Spanish provinces are now reporting unemployment at almost 40%. 
Bankia will tell its executives to return the money in response to a petition from the European commission, which says they should not have been paid bonuses just months before the bank admitted it needed €23bn in bailout money. 
"We have received the instruction via the Bank of Spain and, effectively, those people will have to return their bonuses," a spokeswoman said....

The bonuses were agreed in April when the bank claimed 2011 profits of some €300m. 
But auditors refused to sign the accounts and the bank eventually recognised a €3bn loss.... 
It was not clear whether any of the Bankia executives would refuse to pay back their bonus....
Spain's government has since capped salary payments to executives at state-rescued banks.

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