BANKS SHOULD step up their lending to support economic growth while taking steps to curb “undue” bonuses, European Central Bank head Jean-Claude Trichet said.
“Profits earned should be used – as priority – to build capital and reserves, rather than to be paid out as dividends or undue compensation,” Mr Trichet told a banking conference in Frankfurt.
He maintained that, to weather the financial crisis, banks had received government aid “for their role in the economy, not for the banks by themselves”.
“The financial sector must not forget that it is to serve the economy and not the other way around,” he said. “Compensation and bonuses must remain contained.”
The ECB yesterday showed unexpected impatience to unwind emergency steps taken to combat the economic crisis, announcing plans to tighten the terms on which it lends liquidity to euro zone banks.
It will tighten its rating requirements for banks using asset-backed securities (ABS) as security in its lending operations. From March 1st, 2010, new ABSs will require at least two ratings for newly issued bonds to be eligible as collateral.
The announcement came just hours after Mr Trichet warned banks to prepare for further such steps.
“The financial system and individual institutions within it must act now to ensure that a future removal of central bank support can be managed without painful withdrawal symptoms,” he said.
The ECB is cautious about euro zone economic prospects but sees financial markets recovering and believes delays in executing its exit strategy will risk creating asset price bubbles and excess bank profits.
Since the start of the global finance crisis in August 2007, struggling euro zone banks have had access to financing at favourable rates from the ECB.
As a result banks are now getting back on their feet, with some of them again planning to hand out substantial bonuses and dividends.
Such payments have been blamed for inducing bankers and traders to engage in risky investment ventures that ultimately failed and helped bring on the global crisis.
“We have to understand the concern of our democracies as regards compensation and bonuses,” Mr Trichet said. “The wrong incentives to embark on absurd risks . . . have to be eliminated.”
Mr Trichet’s comments reflect mounting concern among central bankers that banks that have received state backing are using the funds for their own ends rather than to strengthen the economies in which they operate.
“These measures will have to be unwound when the situation normalises,” he said, stressing that they would be “phased out in a timely and gradual fashion”.
Mr Trichet also warned banks that taxpayers would not tolerate the financial industry returning to excessive risk-taking and bonus payments after generous public support to help the sector through the financial crisis. – (Reuters/Copyright The Financial times Limited 2009)
