The European Central Bank (ECB) has criticized the criteria applied in financial institutions to set the bonuses their managers receive, because the institution understands that “they are not always clear and transparent.” The monetary body regrets that they often rely too much on financial performance compared to other key aspects such as risk, control and cultural and behavioral aspects of bankers.
The rebuke comes after a year in which banks have increased their profits thanks to interest rate hikes. In the case of Spanish entities, the large groups earned 20,800 million in 2022, 28% more than the previous year, mainly supported by their interest and commission margin.
Some entities have already rendered accounts of the remuneration of their executives. In the case of BBVA, its president, Carlos Torres, obtained a total remuneration of 8.29 million in 2022, 5.8% more than in 2021. Of this amount, the fixed part is 2.9 million, and the variable amounted to 4.6 million, higher than the previous year. For his part, the CEO, Onur Genç, earned 7.1 million, almost 5% more. The rest of the Spanish banks will publish their remuneration reports in the coming weeks.
The ECB points out that, “surprisingly”, the lack of transparency in bonuses is also valid for bank employees in internal control functions and even for risk managers themselves, adding that supervisors have also observed weaknesses in the alignment of said bonuses. indicators with the appetite for risk, in the processes and controls around variable remuneration and in the application of malus and recovery clauses in the event of assumption of excessive risks or misconduct.
“In general, there is room for improvement in this area, which requires supervisory attention,” concludes the ECB, which will continue to assess banks’ progress in improving risk culture through peer-to-peer benchmarking, the exchange of good practices and ongoing dialogue with the sector, with appropriate supervisory escalation when key weaknesses are identified.
The institution points out that, as part of its supervisory priorities for 2023-25, a specific analysis will assess the “tone from the top”, since this plays a crucial role in holding people accountable for taking risks prudently and for what the body Management should collectively possess the relevant skills and experience, be reputable, consider diverse points of view in discussions, and be able to constructively challenge senior management.
The banking supervisor defends the importance of a solid risk culture, which he defines as the set of rules, attitudes and behaviors related to the awareness, management and control of risks in a bank and which shapes the daily decisions of management and employees with an impact on the risks assumed. “Weaknesses in risk culture may signal problems ahead, such as financial loss or misconduct,” the ECB warns, noting that, conversely, a bank’s strong financial position could be misleading if there is an underlying problem with culture and behavior.
On the other hand, it exposes the importance of accountability and risk appropriation for good governance and an adequate risk culture, pointing out that some banks do not clearly assign the functions and responsibilities of tasks related to risk and control, while others have risk management and compliance functions that do not sufficiently challenge the lines of business or are sometimes overridden by them.