New Guidelines

Small Banks Resist Disclosing Executive Pay

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People are fighting hard to prevent transparency on pay.
  • Why it matters

    Why it matters

    Europe’s financial regulator has adopted executive pay transparency rules to avoid rewarding extremely risky business decisions with excessive bonuses – as occurred during the 2008 financial crisis.

  • Facts

    Facts

    • The German Savings Banks Association believes disclosure provisions under Europe’s Capital Requirement Regulation, or CRR, apply only to large banks.
    • Some small German banks haven’t complied because they believe German law exempts them from doing so.
    • Europe’s financial regulator, the EBA, is expected to publish new guidelines clarifying the obligations of all E.U. banks before the end of this year.
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    Audio

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Privacy was once the greatest of all banking virtues. Europe’s top bankers promoted it with their customers and coveted it with their pocketbooks.

These days, that precious privacy is under attack from all sides by regulators. Since the 2008 financial crisis, banks have been forced to change bonus practices, to surrender information on possible tax-evading clients, and to simplify the way they reveal the risks in their own balance sheets.

If the European Banking Authority, or EBA, has its way, the days of discretion are over – at least when it comes to executive pay.

The banking regulator is stepping up pressure on all European banks, independent of their size, to disclose the details of compensation packages for their top executives, according to a letter that EBA’s chairman, Andrea Enria, wrote to the European Parliament.
The watchdog’s warning is aimed in particular at regional savings banks and small community banks, some of which, in EBA’s view, continue to skirt disclosure rules on executive pay adopted after the 2008 financial crisis.

The European banking regulator installed its disclosure rules for executive compensation to avoid reinforcing extremely risky business decisions with excessive bonuses – as occurred during the 2008 crisis.

“All institutions (no matter of size and remuneration paid to directors, senior managers, identified staff) have to disclose the data requested,” Mr. Enria clarified Mr. Enria in the letter, excerpts of which were obtained by Handelsblatt. “This requirement is lawful,” he added.

The transparency push is part of a broader effort to force banks to reevaluate their executive pay packages in the aftermath of the global financial crisis.

The European banking regulator installed its disclosure rules for executive compensation to avoid reinforcing extremely risky business decisions with excessive bonuses – as occurred during the 2008 crisis.

But a number of smaller German banks, many of which have long been used to policing themselves and have kept at a distance from national regulators, are resisting the new push by European regulators to get a better look at their finances.

Smaller community banks and credit unions – both of which have formed a loose network in Germany that even involves cross-guarantees in the event that one collapses – complain that they are being unfairly subjected to tough new E.U. regulations and bank fees over a crisis that was caused by their larger rivals.

“Credit unions have handled these things on their own, so there is no federal supervision of individual operating procedures,” said a spokesperson for the National Association of German Community Banks.

Germany’s savings banks, a network of some 400 community-owned banks across the country, have led this counter push, and are now arguing they should be exempt from the new privacy rules.

The German Savings Banks Association – DSGV by its German acronym – has a different interpretation of the law. They argue the transparency provisions under Europe’s Capital Requirement Regulation, or CRR, apply only to large banks, which have already widely conformed to the rules.

Some German politicians push their local community bank branches to open up their books.

“The CRR’s transparency rules amount to nothing for savings banks with less than €15 billion in total assets,” a spokesperson told Handelsblatt.

That’s not the way Europe’s regulator sees it. EBA is expected to publish new guidelines before the end of this year clarifying that compensation disclosure rules apply to banks of all shapes and sizes.

Despite their personal reservations, transparency is in the best interest of Europe’s top bankers, Mr. Enria said in his letter, because it can help banks rebuild shareholders’ and the public’s trust.

Mr. Enria, an Italian national, does not view his demand as an encroachment on personal privacy.

Just the opposite, he views his call for transparency as “legitimate” because it serves the goal of creating “sound remuneration policies, which are in turn important for the soundness and stability of financial institutions.”

Some German politicians, ranging from local communities and states to national lawmakers are also starting to get in on the act – and push their local community bank branches to open up their books.

All this has led to a state of confusion in Germany’s banking landscape.

Some community banks and credit unions do not disclose the salaries of their management boards, which often consist only of two people, because they believe German privacy law exempts them from doing so in certain cases.

Some savings banks protect details about the salaries of their executives like state secrets, while others publish only the total compensation of the entire board, but not its individual members.

Some public savings banks – above all those located in the western German state of North Rhine-Westphalia – do disclose the salaries of each board member. As quasi shareholders in these public savings banks, such transparency benefits the members of the communities where the banks are based.

In line with a state law passed six years ago, 102 of the 105 savings banks in North Rhine-Westphalia publish the earnings of all executives with managerial and administrative duties. Two more have said they plan to comply in the future.

The lone holdout is Sparkasse Fröndenberg, the smallest bank in the state, which has sparked resentment well beyond the village of Fröndenberg, near Dortmund.

“Citizens and customers have a right to transparency all over Europe, including in Fröndenberg,“ blasted Sven Giegold, a Green Party member in the European Parliament.

Fröndenberg may not have to wait too much longer, however, since the city council – a key shareholder – is likely to place the issue on its agenda for February 24, according to the council’s coordinator, Heinz-Günter Freck.

North Rhine-Westphalia’s compensation disclosure law for savings banks has set a precedent, with governments in the central German state of Hesse and northern state of Schleswig-Holstein following suit with similar laws.

They appear to be working. In Hesse, only four of 34 public savings banks do not publish executive salaries.

But not all states are taking such action. Currently, for instance, no legislative efforts are under way in Lower Saxony, Baden-Wurttemberg or Bavaria.

 

Elisabeth Atzler is Handelsblatt’s banking correspondent. Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. To contact the authors: atzler@handelsblatt.com and berschens@handelsblatt.com

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