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EU REGULATION WEAKENS BANK EFFORTS TO MANAGE PERFORMANCE AND RISK MANAGEMENT, SAYS NEW MERCER SURVEY

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Survey
  • Majority of EU-based banks plan to increase use of non-performance linked cash allowances or raise base salaries to manage within imposed bonus cap and offset lower bonus opportunities
  • 70% of EU-based banks are seeking approval for increasing bonus cap to 200%
  • 2013 sees rise in number of US banks applying malus in employee bonus payouts

The Capital Requirements Directive IV (CRD IV), European Union regulation which has placed a cap on variable pay in the EU’s banking sector, is weakening efforts by EU-based banks to manage performance and risk through pay, says a new survey by Mercer. The consultancy’s report shows that, in an effort to remain competitive in attracting and retaining talented staff, large numbers of banks are increasing base salaries or using cash allowances as part of the pay mix. These allowances, however, cannot be performance-linked under the EBA’s definition of fixed compensation.

These findings come from Mercer’s Global Financial Services Executive Compensation Snapshot Survey which analyses pay information amongst 78 financial services organisations, including 44 banks in 18 countries. The report surveyed emerging pay practices related to changes in pay mix, application of malus conditions and clawbacks, strategies for addressing CRD IV restrictions and the definition and number of material risk-takers to which regulations apply.

According to Mark Quinn, Head of Talent at Mercer UK and a specialist in Financial Services remuneration, “High-performing employees expect remuneration comparable to their peers, but CRD IV restricts EU-headquartered banks in what they can pay in performance-related compensation. They’re looking at other methods of making up the shortfall to prevent staff walking into the arms of other less regulated competitors, such as hedge funds. Cash allowances are a form of fixed compensation that do not generally require a corresponding increase in benefits costs as base salary increases do. However, both are forms of guaranteed cash with no variable link to performance which is far from satisfactory.”

Since 2008, banks have made much progress structuring pay so that it allowed for appropriate consideration of risk-adjusted outcomes and conduct/compliance behaviors over a multi-year timeframe. Mercer’s report shows that organisations continue to try to strengthen the link between performance management and compensation, introducing individual risk-related factors in performance management and strengthening bonus malus/clawback conditions.

There is also strong evidence that banks are applying malus conditions, i.e., actually reducing or not paying deferred unvested awards when lower performance, non-compliance or misconduct occur. In 2012, 62% of banks applied malus with it being more prevalent amongst European banks (82%) compared to North America (25%).  But in 2013, the proportion of North American banks that applied malus increased to 42%. Almost half of banks said that malus was applied to individuals due to non-compliance or misconduct while almost one-third said that it was applied because of poor performance.

“The progress the banks have made in improving their pay practices over the last several years since the crisis is now being reversed to some extent with the impact of the CRD IV rules”, says Vicki Elliott, Mercer’s Global Financial Services Talent Leader. “To remain competitive, banks are shifting a significant portion of compensation into fixed, guaranteed pay which reduces their ability to pay for performance and also to defer as much compensation subject to malus over a multi-year performance period.“

Mercer has observed that in some cases banks are opting not to pay any upfront annual cash bonus at all in light of the increases in fixed pay and are shifting all variable compensation into multi-year deferral or long-term incentive arrangements.

Strategies to address CRD IV
When asked about their strategies to address CRD IV rules on remuneration, 70% of EU-based banks said they will request approval from shareholders or the parent company to extend the variable pay cap to 200% of total fixed compensation.   In addition, 63% of EU-based banks are implementing or planning to implement base salary increases while only 13% of those based outside the EU will do so. Fifty-five percent of EU-based banks and 47% of non-EU based banks are planning to increase cash allowances to compensate for the bonus cap for impacted risk-taking staff. At least 20% of organisations in the EU and also of organisations outside the EU are enhancing their broader employee value proposition beyond pay elements.  The survey also found that some EU participants are increasing the use of long-term deferred compensation (11%) and lengthening vesting periods (11%). Only 5% will be using “Bail-in” convertible bonds as a long-term compensation vehicle.

Conversion of Variable to Fixed Pay
In shifting variable compensation to fixed compensation, 27% of EU-based banks said they plan to discount variable pay, something that no bank based outside the EU intends to do. However, 39% of banks in the EU said they plan to adjust ratios on an individual basis which may or may not include some discounting.  “If no discounts are applied in the shifting of variable pay at risk for performance to fixed guaranteed pay, then the ‘risk-adjusted value’ of total compensation to the individual has actually increased,” says Dirk Vink, Executive Compensation Consultant and Project Manager for this survey.

The remaining question is how will this shift from variable to fixed compensation impact the market dynamics for talent outside the EU between non-EU based banks and those based in the EU. Since banks based in the EU must apply the same cap rules to their “risk-takers” no matter where they are located in the world, fixed compensation could rise more broadly across other markets as well, leading to less pay for performance.

Banking

ECB stays put but warns about surge in infections

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ECB stays put but warns about surge in infections 1

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.

Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.

But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.

“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.

Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.

Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.

She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.

The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.

MORE STIMULUS?

Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.

Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.

But she signalled those risks were less acute, in part thanks to the recent Brexit deal.

“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”

Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.

“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.

Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.

There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.

The ECB has indicated it may not even need it to use it all.

“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.

Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.

Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.

With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.

(Editing by Catherine Evans)

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Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger

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Bank of Japan lifts next year's growth forecast, saves ammunition as virus risks linger 2

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.

BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.

“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.

As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.

In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.

But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.

“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”

While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.

“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.

NO EXIT EYED

Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.

Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.

Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.

He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.

“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”

(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)

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World Bank, IMF agree to hold April meetings online due to COVID-19 risks

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World Bank, IMF agree to hold April meetings online due to COVID-19 risks 3

WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.

The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.

This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.

(Reporting by Andrea Shalal; Editing by Chris Rees

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