EU law proposes sanctions for risky bank bonuses

By Huw Jones

LONDON/BRUSSELS (Reuters) - The European Union on Monday unveiled a new law that punishes banks who encourage too much risk-taking with their policies on pay, in an effort to put an end to the practices blamed for the credit crunch.

A draft law published by the European Commission tightens EU rules on bank capital and requires banks to improve disclosure of the holdings in securitised products, bidding to apply lessons from the worst financial crisis since the 1930s.

The rules, coupled with other anticipated reforms such as a cap on leverage and other types of capital and liquidity buffers, will make it harder for banks to earn high returns on their assets.

They are due to come into force in 2011 as part of wider efforts to restore confidence in the financial sector, but may yet be delayed because they will dampen banks' ability to lend and aid the economic recovery in the meantime.

"If we think it needs to be delayed further, that could be done, if we think they could have a detrimental effect on the general economy," Ruth Walters, an official at the Commission's internal market unit, told reporters.

On pay, the focus is on top officials, whose work affects the bank's risk profile, ensuring there is an "appropriate" balance between fixed and variable pay and also taking in severance pay.

"It is true that employment contracts are likely to be renegotiated and that the fixed component awarded could be higher," the Commission said.

Supervisors will not determine actual levels of pay.