Bank bonuses could in future be paid through bank bonds, and banks will have to reduce the amount of risky trading they do, according to a set of recommendations presented to the European Commission today.
The options are designed to reduce the amount of risk taking financial lenders take on, and to protect consumers and taxpayers, according to the Commission.
The recommendations have been drawn up by an expert group chaired by the head of the Bank of Finland, Erkki Liikanen.
The group's report identifies excessive risk taking and lack of adequate bank capital as key causes of Europe's banking and economic crisis.
The report recommends the future legal separation of risky trading activities, such as securities and derivatives trading using customers' deposits, from the normal activities of banks.
The report says this would be to protect such activities as deposit taking and providing loans to ordinary consumers, and to limit the exposure to taxpayers if a bank's risky trading activities get it into trouble.
Separating these activities would make banks more transparent and more open to discipline in the future, the report concludes.
However, separation would only be compulsory if such trading represented a significant portion of a bank's - or banking group's - activity in relation to the size of its balance sheet.
The review of the banking sector also recommends banks paying bonuses through debt, or bank bonds.
Using bonds for bonuses is designed to avoid the dangers of paying shares that could motivate high risk-taking in a bid to boost profits and share prices.
The report also recommends the use of so-called "bail-in" instruments, whereby unsecured creditors would have to contribute to recapitalising banks and compensating depositors to cover serious losses.
Today's recommendations were presented to the Internal Market Commissioner Michel Barnier, and they may form part of a raft of banking legislation which the Commission is expected to publish over the next six months.
Presenting the report, Mr Liikanen said the idea was to move away from a system “where profit is private and the cost is public”, referring to cases where taxpayers have been punished due to the risk taking of banks.
