G20 finance ministers and central bankers have agreed a series of measures to curb excessive bank bonuses, including spreading payments over a number of years, inserting clawback provisions in contracts and forcing financial firms to reveal high earners in annual reports.
Meeting in London at a summit chaired by Alistair Darling, the chancellor, the G20 finance ministers instructed the new Financial Stability Board (FSB) to come up with detailed proposals, some of which will be available in time for the G20 meeting in Pittsburgh later this month.
They deferred a decision on imposing caps on bank bonuses. Officials said caps on individuals' bonuses had been rejected but that the Financial Stability Board would examine whether caps on institutions could be introduced, in line with French demands.
The decision to leave discussion of capping bonus pools on the table was a victory for France. Darling said after the meeting that while the other agreements on bonuses were firm, the question of capping bonus pools was potentially more difficult.
The FSB, the body set up by the G20 to monitor and advise on changes to the financial system, would examine the practicalities. If agreed, regulators would have the power to tell banks to cut bonus pools.
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However, Darling said that all G20 countries were determined to put a stop to bonus practices that had contributed to the financial crisis.
"I hope we are not going to enter an era where people are again rewarded for reckless behaviour," he said.
Though the details on bonuses are still to be finalised, the deal will be seen as a sign of the determination of all countries, including America, to rein in bankers.
Tim Geithner, the US Treasury secretary, said: "We welcome the support we found here in Europe and among the G20 for compensation reform as part of comprehensive reform of the financial system . . . Compensation reform is a necessary part of building a more stable financial system."
Clawback clauses would work by forcing bankers to pay back bonuses earned on loans or other deals that subsequently turn sour. Forcing banks to pay out only over a number of years would be intended to ensure bonuses are not paid out purely to reward short-term performance. The proposals would also outlaw guaranteed bonuses.
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The G20 said it would aim for "global standards on pay structure, including on deferral, effective clawback, the relationship between fixed and variable remuneration, and guaranteed bonuses, to ensure compensation practices are aligned with long-term value creation and financial stability".
"Our unprecedented, decisive and concerted policy action has helped to arrest the decline and boost global demand," it said. "Financial markets are stabilising and the global economy is improving, but we remain cautious about the outlook for growth and jobs."
Gordon Brown, addressing the start of the meeting, said concerted action had saved 7m to 11m jobs worldwide.
However, the G20 agreed on exit strategies for when the crisis is over, stressing the need for "a transparent and credible process for withdrawing our extraordinary fiscal, monetary and financial sector support as recovery becomes firmly secured".
The International Monetary Fund and the FSB would advise on such "co-operative and co-ordinated exit strategies", it said.
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Other banking measures agreed by the G20 included requiring banks to hold more high quality, tier one capital.
Geithner said America would sign up to the Basel rules on bank capital. The G20 agreed those rules should be extended to cover bank leverage ratios, which proved a key vulnerability for Bear Stearns and Lehman Brothers.
Greater stability would be achieved by "requiring banks to hold more and better quality capital once recovery is assured" and developing "an international set of minimum quantitative standards for high quality liquidity".
Darling said work needed to be done on correcting the global imbalances that led to the crisis and improving the tools available to regulators and central banks.
"If we simply concentrate on bonuses we'll be making a big mistake," he said.