STRONG ARGUMENTS for the injection of new blood in Irish banking – by the selection of more high quality non-executive directors – and for fresh thinking on bank pay and bonuses were made by a senior Central Bank official at a recent banking conference. New blood is required to help ensure better corporate governance as one means of avoiding a future banking crisis. And new thinking is needed to ensure bank executives are never again rewarded for financial failure; where, by taking excessive banking risks and by making imprudent loans, they have put the financial system in jeopardy at little financial cost to themselves.
Reckless lending practices have destroyed shareholder value, wiped out the wealth of many bank investors and placed an unfair burden on all taxpayers, obliged to rescue the banks at great cost. So far, Jonathon McMahon, assistant director general, Financial Institutions Supervision, is unimpressed by the reforms under consideration by domestic banks. And specifically, on bankers’ pay, Mr McMahon found the banks’ efforts to date “discouraging”.
Next month the Central Bank will publish a review of corporate governance in the banks and on their pay practices in order to accelerate the pace of change. Taxpayers are reluctant and involuntary underwriters of the banks. They have ensured their survival at ever greater cost as loan losses have soared. In return, the least financial institutions must do by way of partial public recompense is to introduce a very different pay framework for senior bank executives.
As Mr McMahon made clear, the Central Bank is now looking for “tangible evidence” that banks are ready to change past practices that encouraged “inappropriate risk-taking” and also committed to ensuring bankers are not rewarded today for risk taking that produces future losses. Bonuses, which represent a significant part of bankers’ pay, are not subject to any clawback, even when losses later materialise, which suggest a bonus was paid on “illusory performance”.
The Committee of European Banking Supervisors, drawn from EU member-states, has proposed a solution this month. It recommended that up to 60 per cent of top bankers’ bonuses should be deferred for up to five years, with half the bonus paid in shares. That, and the introduction of a clawback arrangement to recover bonuses received on the basis of “illusory performance” are the minimum needed to assuage – if only partly – aggrieved taxpayers.