Going CoCo

11 August 2010 By Neil Unmack Follow @unmack1

European regulators are designing rules to make banks pay part of their bonuses in contingent capital bonds. Employees may hate the idea, but paying compensation in hybrid debt should make them less reckless. It could also help develop the market for new kinds of bank capital.

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The European Parliament ruled in July that bankers' bonuses should be paid partly in contingent capital debt, as part of broader changes to remuneration guidelines under the Capital Requirements Directive (CRD).

The rules would force at least 50 percent of bonuses to be paid in "an appropriate balance" of shares or instruments that can be converted into equity in times of stress, according to the directive passed July 7. The Committee of European Banking Supervisors is working on guidelines on how to implement the directive, and will consult with the industry later in the year.

The UK Financial Services Authority is consulting over changes to its remuneration code to bring it into line with the directive. The proposals include paying bonuses with "longdated financial instruments that adequately reflect credit quality".

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