Irish banks 'must stop bonuses rewarding risk'

Ireland's central bank today ordered lenders to overhaul pay practices and to stop staff being rewarded for risk-taking.

The Central Bank of Ireland wrote to bank bosses warning them they faced fines and individual bankers disqualification if they did not restructure bonus practices.

"It is clear that boards need to become much more objective and independent in their monitoring of remuneration and less accommodating in their bargaining with employees and potential employees," it said.

The central bank said that although most lenders were implementing reforms, the findings of a review into pay policies had been discouraging and that only one bank had taken an obvious lead.

"If a bank is not employing the right financial incentives, it is not managing its risks - it's as simple as that. We expect banks to have dealt with these issues when we review their remuneration practices again in 2011," said Jonathan McMahon, head of financial institutions supervision at the central bank.

Irish banks' big bonus culture and poor boardroom oversight fuelled a disastrous property bubble that brought the sector to it knees and forced the state to seek emergency assistance from the IMF and the EU this month.

Today the central bank warned that under new European and domestic rules from next year, it would be able to punish banks for failing to improve their pay practices.

The central bank can fine banks a maximum of 5 million (£4.2 million) or individuals a maximum of 500,000 but is unable to apply those penalties in relation to pay. From next year it will be able to punish non-compliant lenders and is seeking to beef up its arsenal of penalties.

It warned that senior bankers' pay was still not directly linked to risk management, meaning the government, which has guaranteed Ireland's largely broken banking sector, could be exposed to future reckless lending.

"The majority of banks were found to have given little or no consideration to preparing for the implementation of impending European requirements and guidance on remuneration, which will become effective in Ireland on January 1, 2011," the central bank said.

Non-executives need to step up their scrutiny of pay practices and the reasoning behind remuneration decisions needs to be transparent, the central bank said. Corporate governance has come under close scrutiny in Ireland, where a close-knit business community created a cosy network of board members.

During the boom years, banking executives were able to side-step their boards and build private property empires using loans from their own banks.

The former chief executive of Irish Nationwide Building Society, Michael Fingleton, retired a year ago with a 1 million bonus, and former executives at collapsed Anglo Irish Bank, some of whom have fled overseas, have become hate figures in the media.