BANKS HAVE not done enough to reform remuneration practices and only one institution has taken “an obvious lead” in changing how it rewards staff, according to a senior Central Bank official.
Jonathan McMahon, assistant director general of financial institutions’ supervision, said that while banks had started to change remuneration practices, the balance of its findings was “discouraging”.
Speaking at the Irish Banking Federation’s national conference, Mr McMahon said remuneration practices reflect corporate culture and the need for “sound remuneration and incentive procedures has been laboured”.
The Central Bank would publish findings of its review of bank pay practices to encourage changes at a greater pace, he said.
“No board ought to be making decisions on remuneration unless it has concluded what risks it wishes to take, and which it wishes to avoid; and no banker ought to be rewarded today for taking risks which lead to losses in the future,” said Mr McMahon.
Improvement is required in corporate governance standards at the banks, he said, although “the degree of improvement varies between institutions”.
The Central Bank will publish a review of corporate governance standards on November 8th.
Mr McMahon said it would introduce rules to create a more effective credit bureau, showing loans to borrowers across various financial institutions, if the private sector failed to improve this.
As banks become more focused on the home market after selling overseas businesses for capital, the Central Bank would consider credit controls to ensure lending standards don’t fall, he said.
To improve their quality of non-executive directors, banks needed to widen their search and spend more time finding the right candidates, as well as pay them more, he said.
“While new blood is required for the Irish banking system, the changes we are seeking do not exclude individuals employed by banks during the crisis,” he said. “There are clearly ex-bankers who should not resurrect careers in the Irish banking system. Conversely, there are individuals who have sought to learn from the crisis, and whose experience will make them valuable members of banks’ boards.” There was no ideal board member, he said, but a process of trial and error would find suitable candidates where it had been “largely” done by error in the past.
Non-executive directors with experience in small and medium-sized businesses and banking could be useful now, he said.
Non-executive directors needed to make people around bank board tables “uncomfortable” at times and ask difficult questions.
Mr McMahon said the Central Bank would have to factor new capital rules into its planning assumptions over time.
Irmfried Schwimann, director at the European Commission’s directorate general for competition, addressed the conference on the importance of limiting the distorting effects of state aid on competition in the banking sector.
“We shouldn’t have a situation where a distressed bank is favoured over a sounder bank,” she said.
