[author: Kevin Wong]

On January 10, the European Central Bank (“ECB“) published a letter (SSM/2019/010) (dated January 9, 2019) from Andrea Enria, ECB Supervisory Board Chair, on the variable remuneration policies of credit institutions in the single supervisory mechanism (“SSM“).

The letter states that the ECB pays close attention to the dividend and remuneration policies of the financial institutions under its supervision. In particular, the ECB will focus on any impact that these policies may have on the maintenance of a sound capital base.

The ECB underlines the need for firms to:

• Duly consider the potentially detrimental impact of their remuneration policy on their ability to maintain a sound capital base, especially taking into account the transitional requirements set out in the CRD IV Directive (2013/36/EU) and the transitional arrangements for mitigating the impact of the introduction of IFRS 9 on own funds under Article 473a of the Capital Requirements Regulation (575/2013) (“CRR“); and
• Adopt a prudent, forward-looking stance when deciding on a remuneration policy.

When a firm makes variable remuneration awards (including the use of malus and clawback arrangements) under its remuneration policy, the ECB recommends that the firm in question applies a policy that is consistent with a conservative (at a minimum, a linear) path towards its fully-loaded capital requirements, including the combined buffer requirement, and outcomes of the supervisory review and evaluation process (“SREP“).