EU agrees to cap bankers' bonuses

 

David Cameron says regulations need to be flexible enough for UK-based banks to compete internationally

European Union officials have struck a provisional deal on new financial rules, including capping bank bonuses.

Under the agreement, bonuses will be capped at a year's salary, but can rise to two years' pay if there is explicit approval from shareholders.

The UK, which hosts Europe's biggest financial services centre, was opposed to any caps on bank bonuses.

Prime Minister David Cameron said the EU should concentrate on tightening up banks in other ways.

"We are absolutely clear that we must be able to implement the Vickers plan in the UK, which in some ways is tougher than regulations that are being put in place in other European countries.

"We want to have this proper ring fence between retail banks and investment banks and the rules must allow that to happen."

'Restrict growth'

The Vickers plan, based on the Independent Commission on Banking report led by Sir John Vickers, is designed to keep saver and business deposits from being compromised by the more speculative activities typically undertaken by investment banking operations.

London argues the EU's bonus rules would drive away talent and restrict growth in the financial sector.

The UK had been trying to rally other governments in the 27 countries in the EU behind its position.

Top bankers and financial traders can earn bonuses multiple times their base salaries. But there has been public outrage over bonuses following the huge bail-outs of banks.

The agreement was reached during eight hours of intense talks in Brussels between members of the European parliament, the European Commission and representatives of the bloc's 27 governments.

Core business

Othmar Karas, the European Parliament's chief negotiator, said: "For the first time in the history of EU financial market regulation, we will cap bankers' bonuses.

"The essence is that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business, namely financing the real economy, that of small and medium-sized enterprises and jobs."

But Joe Rundle, head of trading at ETX Capital, in London, said the cap would backfire. He told the BBC: "It will drive up fixed salaries to compensate. Businesses that do not need to be inside the European Union will leave. And when banks invest in future divisions, it will be outside the EU."

The deal paves the way for Basel III, an overhaul of banking rules.

The G20 group of rich nations had originally planned to bring in Basel III last month, but that has been delayed to January 2014.

Basel III focuses on a ratio of high-quality capital - called tier 1 - which is needed to cushion it against any future shocks. It will rise to 9% after the rules come into effect.

Once the proposals are formally agreed it will start the biggest shake-up of the banking system since the global financial crisis.

The lack of solid financial cushions meant that many banks were vulnerable, and eventually required taxpayer-funded bailouts to avoid bankruptcy.

 

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  • rate this
    +3

    Comment number 785.

    The city of London - like it or not - is a huge part of the UK economy. In the Broon years it contributed 25% of all tax revenue.

    Consider the importance of agriculture to the French economy.

    It appears that, if voted-in by simple majority, we cannot stop the bonus cap.

    How would the French react to interference by the EU in agriculture - like reducing CAP payments, for example?. Just imagine

  • rate this
    +19

    Comment number 780.

    All bonuses for anyone should be capped at 50% of annual salary and they should be based on very strict performance metrics. That is how any private business works. Frankly, anyone earning a bonus of 100% of their salary is offensive to me.

  • rate this
    -31

    Comment number 39.

    A simplistic judgement by EU law makers that won't have any positive effect, they've just squeezed the balloon at the top (EU) so it stretches out at the bottom (RoW).

    Unless a worldwide agreement is made, many of the highly paid VP, Director and front office trading roles will displace to the less regulated geographies: Singapore, Hong Kong, Switzerland etc.

  • rate this
    +152

    Comment number 33.

    Only a bonus of 1 years basic salary? Oh my heart bleeds for them, most people would be utterly overjoyed at receiving a bonus of their whole year's salary. I would be happy to get a bonus full stop, most people aren't getting them in the current climate. Just shows the level of greed in that sector and, if they are losing so much money, why do they get bonuses at all?!

  • rate this
    -62

    Comment number 31.

    It seems that many people on here don't get that capping salaries and bonuses here will just drive business (and tax receipts from said businesses and their employees) to one of the many other competing centres (NY, Singapore, Zurich). It won't prevent future financial crises, and to think it will is facile. Make no mistake, this is the turkeys voting for christmas.

 

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