- Regulation of banks — Investment business
This chapter addresses the issue of executive and employee compensation in financial institutions. Excessive pay at financial institutions has often been indicated as one of the possible causes of the recent financial crisis, but the case for regulating compensation is rather weak, while regulation of remuneration and risk governance, and of remuneration disclosure are to some extent justified. The EU law shifted the setting of compensation from a supervisory approach to a regulatory one, adopting detailed and rigid provisions on the structure, governance, and disclosure of pay. Moreover, the Capital Requirements Directive (CRD IV) introduced an unprecedented cap to variable remuneration, which may distort incentives and produce unintended consequences on bank risk-taking. The chapter then looks at possible ways to overcome the shortcomings of EU regulation of financial institutions in the remuneration are and suggests that it should be made more flexible and proportionate within the limits allowed by the international principles.