Banks would have to put aside more and higher quality capital to provide a cushion against potential losses, it said.

"Compensation practices at large financial institutions are one factor among many that contributed to the financial crisis that began in 2007," the FSB said in a policy document.

"High short-term profits led to generous bonus payments to employees without adequate regard to the longer-term risks they imposed on their firms," it said.

FSB members - which include all G20 members, Spain and the European Commission - must commit to applying principles agreed by the forum, which become effective immediately.

The FSB has drawn up principles on remuneration for national regulators to apply. They were presented at the summit to apply lessons from the financial crisis.

There has been public outcry in the United States, Britain and elsewhere over bonuses, especially those given by banks that received taxpayer money to stay afloat.

One principle says the board of a bank must actively oversee how compensation schemes are designed and monitored.

"Authorities expect evidence of material progress in the implementation of the principles by the 2009 remuneration round," the FSB said.

The FSB proposals also detailed planned changes to bank capital rules and how national supervisors cooperate.

The FSB said the global Basel Committee on Banking Supervision would put forward a raft of draft changes to bank capital rules before the end of 2009 for consultation.

The Basel Committee's Basel II standards have been criticized for being pro-cyclical or exacerbating crises.

The Basel Committee will propose a simple ratio to contain bank leverage as a supplement to its current "risk based approach" to determining capital requirements.

Banks would also have to build up buffers in good times to be run down when markets turned sour and avoid the need for huge taxpayer bailouts.

"They will be implemented over time once conditions in financial markets return to normal," the FSB said.

The FSB also published principles for supervisors, central banks and finance ministries to cooperate in making advanced preparations for dealing with financial crises and in managing them when they happen.

The authorities from different countries would commit to meeting regularly alongside core supervisory colleges that the G20 wants set up for each major cross-border financial institution to spot problems earlier and intervene quickly.

"The FSB will act as a clearing house for experiences in information sharing and contingency planning for the benefit of its members," the FSB said.

China Daily, AP and Reuters

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