European Economic News
10/26/2009 5:55 AM ET
(RTTNews) -
Banks should preserve capital instead of paying it to bankers and investors, European Central Bank governing council member Christian Noyer said Monday.
Conserving capital would require some restraint in dividend distribution and in the overall amount of variable compensation, the policy maker said. "In parallel, all possibilities to issue new equity should be exploited," he said in Singapore.
Citing recent impressive profits made by banks, Noyer, who is also the chief of the Bank of France said, "It is striking that these performances were achieved only a few months after some of those same institutions came very close to failure." He noted that it did not mean the banking sector recovered its lost balance and there is no need for further reform.
According to Noyer, banks gained profits mainly due to the support from measures taken by policy makers. "Nothing could be further from the truth," he said. "One major risk in the period to come is the emergence of a business-as-usual mentality."
In the G-20 meeting held in Pittsburgh in September, U.S. President Barack Obama forged an agreement with leaders of the twenty industrialized nations to reform financial regulation and supervision to avoid a return to the risky practices that led to crisis. The G-20 agreed on strong international standards for bank capital - calling on banks to hold more and higher quality capital. The group also agreed on strong international standards for compensation aimed at ending practices that lead to excessive risk-taking.
Noyer said there are signs that parts of the financial industry have resumed risk-taking practices, reminiscent of those which led to the crisis. Hinting at bankers' pay, he said it appears "out of line" with the underlying performance of the industry. But, the G-20 had warned that a return to reckless behavior and a lack of responsibility that led to the crisis will not be tolerated. Recently, British Financial Services Secretary Paul Myners said UK subsidiaries and branches of leading overseas banks have agreed to support reforms to bank pay agreed by the G-20.
Further, Noyer said efforts towards long term reform must not create additional downside risks to economic activity in the short-term. In the long run, he said, banks should be robust and better capitalized and in the short term, they must focus on profits to strengthen balance sheets and finance credit.
On the global economy, Noyer said it has stabilized and the worst had been avoided, though downside risks remain. He said the current forecasts by the International Monetary Fund shows reasonable prospects for growth in the world economy in 2010.
by RTT Staff Writer
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