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Financial Times, July 18, 2008 article

 

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Banks told to tackle risk and pay

By Krishna Guha and Francesco Guerrera in Washington

Published: July 18 2008 03:00 | Last updated: July 18 2008 03:00

 

Financial institutions must swiftly implement far-reaching changes to their risk management, compensation schemes and other business practices to secure "political and social acceptance" after the credit crisis, Josef Ackermann, chairman of Deutsche Bank, said yesterday.

Mr Ackermann's comments came as the Institute of International Finance, the global banking industry association he chairs, released its final report on what should be done to prevent a repeat of the crisis.

The IIF backed away from an earlier suggestion that fair value accounting rules - which require banks to mark securities held in their trading books to market prices - could be suspended as a circuit breaker to stop a downward spiral in the markets.

Instead, it said that accounting rules must be re-examined along with risk management practices, regulatory and capital rules once the crisis is over to ensure that the overall architecture of the financial system is not pro-cyclical in future.

The IIF also agreed for the first time that if there were to be any adjustments to the mark-to-market rules, they needed to be symmetrical - treating prices in ultra-liquid markets with equal suspicion as prices in illiquid markets.

Mr Ackermann said the private sector was willing to talk to the authorities about proposals for countercylical capital requirements - something many central bankers and regulators think are needed to make the financial system more stable.

Many banks are deeply opposed to any rules that might force them to hold more capital than they think they need in good times.

However, the Deutsche bank chief said that he thought the idea of countercyclical requirements was "worth studying".

Mr Ackermann said it would be "very important to have more convergence" between US and international accounting standards in the future, to create a transparent and level playing field.

Deutsche Bank's leverage ratio, he said, looked completely different under the two accounting regimes, while they also imposed different rules as to the reclassification of securities.

The final report sets out a long list of specific proposals aimed at improving risk management, stability and transparency in the financial system.

It says pay schemes should be based on "risk-adjusted performance" aligned with shareholder interests and "long-term, firm-wide profitability". Companies should ensure that employee incentives do not "induce risk-taking in excess of the firm's appetite" and should "align payout with the timing of related risk-adjusted profit".

They should also make sure that severance pay for departing executives takes into account "realised performance for shareholders over time".

This last recommendation follows popular outrage at lavish severance packages for some banking executives who left after their banks announced big losses.

Mr Ackermann said banks would continue to set their own levels of compensation and their leaderships would ultimately be responsible for compliance with the new practices. But he said the IIF would "informally" monitor the situation and that peer pressure, along with pressure from shareholders, would encourage banks to follow best practice.

 

 

 

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