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Trichet: Banks Should Lend More, Curb Bonuses

Friday, 20 Nov 2009 10:21 AM

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FRANKFURT -- Banks should step up their lending to support economic growth while taking steps to curb "undue" bonuses, European Central Bank head Jean-Claude Trichet said Friday.

"Profits earned should be used -- as priority -- to build capital and reserves, rather than to be paid out as dividends or undue compensation," Trichet told a banking conference here.

He maintained that to weather the financial crisis banks had received government aid "for their role in the economy, not for the banks by themselves."

"The financial sector must not forget that it is to serve the economy and not the other way around," he asserted.

"Compensation and bonuses must remain contained."

Since the start of the global finance crisis in August 2007, brought on by the near-meltdown of the US sub-prime housing market, struggling eurozone banks have had access to financing at favourable rates from the ECB.

As a result banks are now getting back on their feet, with some of them again planning to hand out substantial bonuses and dividends.

Such payments have been blamed for inducing bankers and traders to engage in risky investment ventures that ultimately failed and helped bring on the global crisis.

"We have to understand the concern of our democracies as regards compensation and bonuses," Trichet said.

"The wrong incentives to embark on absurd risks ... have to be eliminated."

Trichet's comments reflect mounting concern among central bankers that banks that have received state backing are using the funds for their own ends rather than to strengthen the economies in which they operate.

"These measures will have to be unwound when the situation normalises," he said, stressing that they would be "phased out in a timely and gradual fashion."

Copyright © 2009 AFP. All rights reserved.

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