Bankers’ salaries must be capped

Ms Lautenschläger, what do you consider to be a fair salary?

That is a difficult question. What is considered a fair salary is very subjective and has a great deal to do with the social environment. I personally find it difficult to understand how professional footballers or Formula 1 drivers can earn tens of millions each year, but other people might not consider it an issue.

Do you consider it an issue that a trader at Deutsche Bank was able to claim a €40 million bonus over a period of three years?

No matter how hard or how successfully an investment banker has worked, it is impossible to justify million-euro salaries on this scale. For most people, many banks and bankers live in a different world. This might threaten the cohesion of society. That is why there are now compensation rules which particularly target the incentive to take excessive risks. However, there is still more to be done.

What exactly do you mean?

The financial industry around the world must refrain from concluding absurd bonus agreements in the competition for the best talents.

If the industry fails to do this voluntarily, should legislators cap bank salaries?

Yes, even if this is a difficult task.

What should this cap look like?

Among other things, a bonus limit of one to two times the fixed salary is being discussed at European level. This limits the compensation to a certain degree. However, banks can adjust their fixed salaries to get the results they want.

Does that mean legislators are powerless?

No. There are a number of useful regulations. I believe that banks should defer an even larger proportion of the bonus claims over a longer period. The current agreements specify a deferral period of three to five years. Personally, I would prefer five years, or even longer for large bonuses, because some banking business only proves to be risky after a few years. However, these kind of compensation rules would then need to be coordinated and agreed upon internationally.

Otherwise talented employees will migrate to London or Singapore?

Precisely. A level playing field is especially important for the large, systemically important banks which compete fiercely for staff.

Should bonuses be linked to an institution’s total profit, and should they be withheld if a loss is made?

Yes, the proposals from the Liikanen Group embrace a similar concept. Banks should pay out a proportion of their employees’ bonus claims in the form of debt securities, known as “bail-in” capital. Should the institution get into trouble, these debt securities are converted into equity and thus participate in the bank's loss. However, compensation regulations like this would need to be coordinated and agreed internationally.

The trend has reversed at some institutions – the number of bonuses paid out over several years as a proportion of the total bonus payments is falling. Should this trend be stopped?

Yes, that is worth considering.

Some investment bankers have improved their salaries by manipulating the Libor interest rate benchmark. What progress have you made in investigating the German banks involved in the Libor scandal?

It differs from one bank to the next. The investigations have been concluded at some banks.

We have heard that the results are to be published in the next few months. Is that correct?

That may be the case for some banks.

Including Deutsche Bank?

I cannot comment on individual institutions.

What are the lessons to be learned from the Libor affair? Elke König, the head of Germany’s Federal Financial Supervisory Authority (BaFin), has called for the Libor to be scrapped.

My chief concern is that the markets have informative interest rates and that orderly processes are used to set the reference interest rates. Of course, the latter does not solve the problem that the Libor and Euribor rates contain conceptual flaws. However, I have my doubts as to whether we can simply do away with these rates. That is easier said than done because reference interest rates are not only a benchmark for institutional investors, but also for private house builders. We therefore need a sensible solution that has been coordinated and can be agreed upon at an international level. The relevant bodies are developing potential solutions. We should wait for their proposals.

Nevertheless, what fundamental changes need to be made to the way the reference rate is calculated?

Institutions need to comply with documentation requirements and control structures when submitting data and assign the provision of information for Libor and Euribor interest rates to a higher risk category.

What does that mean?

Submitting interest rates was often classified as a low risk activity. The control systems in place at the institutions were therefore underdeveloped. We need to put a stop to this to prevent this type of scandal from happening again.

Anshu Jain, co-CEO of Deutsche Bank, recently said that the Libor scandal is the issue that currently concerns him the most. To what extent does the affair affect the financial sector as a whole?

The Libor affair is without doubt one of the largest financial scandals reported by the media in recent years. I think it is absolutely right that European legislators are considering making such manipulations a criminal offence.

The British bank Barclays and the Swiss bank UBS have had to pay millions in fines for involvement in the Libor manipulations. Should German institutions expect to have to pay similar fines?

The fines they may face must be decided by the British supervisors. That is a separate procedure to ours.

How is the extent of the penalty decided?

The response of the German supervisors depends on what shortcomings have been identified in the business operations and whether there is evidence that senior management was aware of the manipulation.

So should managers at Deutsche Bank be worried about their jobs?

Again, I cannot comment on individual banks.

But even if a top banker cannot be accused of any personal misconduct, perhaps he has to accept responsibility.

I don’t understand your question. If there has been no misconduct, that is to say, no organisational deficiencies or knowledge of manipulation, then there will be no supervisory consequences. But if you are talking about responsibility, I would dearly like to see banks refocus on their role as service providers to private customers and companies in future.

This kind of cultural change would have to come from the top, wouldn’t it?

Absolutely. The change must be led by members of the executive board. But the banks’ shareholders also need to show a renewed interest in sustainability. Shareholders or investors who demand double-digit returns should not be surprised if banks start to take extra risks.

There are plans to concentrate banking supervision at the ECB so that such risks can be identified at an early stage in future. Can an authority this large function effectively?

Yes, if it is carefully prepared and if there is optimum cooperation between national supervisors and the ECB. It is worth making the effort, because a European supervisory authority could be of considerable benefit.

What would be your suggestions?

First, it is important that the national central banks are able to contribute their macro and microeconomic knowledge to this system, because they are the ones that have an overview of not only their local banking business, but also regional economic developments and the national infrastructure. Second, it is not enough to assess only institution-specific figures. Instead, they need to be used to make a useful cross-border comparison. Third, regular contact with those in senior roles at the banks is required. Supervisors need to understand the culture and the jurisdiction. Fourth, this European supervisory system requires a single supervisory approach, which sounds simple but is difficult to implement.

What are you focusing on?

The focus of the German supervisors is currently on the institutions’ business models. Which transactions does the institution hope to use to generate profit? Is that possible in light of the specific national or regional economic situation? What is the competitive environment in which the bank operates? If 2,000 institutions in Germany wish to expand their business with small and medium-sized enterprises (SMEs), the issue of margin pressure soon arises.

But you can’t ban a bank from doing business with SMEs.

That is true. But I can check the bank's chances of success in light of its business model. I can also speak to the CEO and, if there is any doubt, with the supervisory board too. I can express my concerns and ask the management to consider a Plan B.

Is the plan to introduce European banking supervision in March 2014 actually realistic?

The schedule is very ambitious. However, it is basically feasible – but only if we build on the existing structure. If everything has to be set up from scratch, it is not achievable organisationally, conceptually or in terms of staff.

How many staff does the ECB need for banking supervision?

It is difficult to say, but it needs enough to cover three aspects: first, the ECB banking supervisors responsible for supervising institutions must be able to talk to national supervisors on an equal footing. Second, they need a work unit in charge of creating comparisons, whose main responsibility is making sensible use of the information gathered. Third, they need staff who work on regulatory issues.

The central bank governors in each country have the last word on banking supervision. Is that compatible with the principle of independent monetary policy?

Strict separation between monetary policy and banking supervision is desirable.The decision to set up supervision at the ECB was made so that responsibility now lies with the ECB’s Governing Council and its members.We must now fulfil this responsibility.

Are there too many banks in Germany?

In the next five years, we will discover how great the need for consolidation is in the German banking sector. The way in which banks handle their cost structures will be a key factor.

Does that also include the new Basel III capital rules?

Absolutely. Setting aside more of their own funds will place a burden on banks – even though it is justified.

Plans to segregate the banking system in Germany could create additional burdens. Is this necessary, or is it an attempt to gain public support during an election year?

Transferring own-account trading and loans to hedge funds to a separate business unit is a way of increasing protection at deposit-taking institutions. This allows contagion to be limited to a certain extent, although it cannot be completely eliminated. To me, it is important that the established universal banking system continues to exist for the real economy.

© Handelsblatt GmbH. All rights reserved.