Q&A: EU banker bonus cap plan
- 28 February 2013
- From the section Business
It seems that the European Union is poised to cap bank bonuses across the 27 members in the trading bloc.
The agreement was reached during eight hours of intense talks in Brussels between members of the European Parliament, the European Commission and representatives of all the governments.
The UK, which has Europe's biggest financial services centre in London, is opposed to any caps on bank bonuses and will now try to fight its final adoption.
What is the proposed bonus cap?
Under the agreement, bonuses will be capped at a year's salary, but it can be a bonus worth 200% of their pay if there is explicit approval from shareholders.
The members of the European Parliament fought for the ratio and are responsible for pushing it through to its current stages.
Othmar Karas, the Parliament's chief negotiator, said: "We have achieved the most comprehensive bank regulation package in the EU. Banks will be stabilised and more resistant to crises."
According to the MEPs, under the proposed rule changes, the higher 2-to-1 ratio would require the votes of at least 65% of shareholders owning half the shares represented, or 75% of shareholders in total.
"To encourage bankers to take a long-term view," they say, if the bonus is increased above the 100%-of-salary cap, a quarter of the larger bonus would be deferred for at least five years.
How do bankers get paid now?
Currently, top bankers and financial traders can earn bonuses multiple times their base salaries.
Still, banks no longer have the same freedom to pay what they like as they did before the financial crisis.
In December 2010, European regulators announced tough restrictions on the bonuses that banks can pay their staff, so that they could receive only 20-30% of their bonuses in immediate cash.
The guidelines required banks to defer 40-60% of bonuses for three to five years and pay 50% of bonuses in shares (rather than cash), set a maximum bonus level as a percentage of an individual's basic pay, and publish pay details for "senior management and risk takers".
Regulators have also encouraged banks to "claw back" pay - reclaiming compensation if an individual's performance is later not deemed worthy of the pay or if something goes awry in the future.
The UK's City watchdog, the Financial Services Authority (FSA), said its remuneration code was aligned to rules agreed by the EU's Committee of European Banking Supervisors (CEBS).
However, Hector Sants, who was head of the FSA at the time, told the BBC in 2010: "The question of the size of individual payments is not one for the regulator. That is one for politicians and society as a whole."
Are there any other bank rule changes proposed?
Several. The rules also raise thresholds of high-quality capital that banks need to set aside in case of future losses, dubbed "Tier 1" capital. Under EU rules, banks will be required to hold a minimum of 8% of Tier 1 capital on their balance sheets from 1 January 2014.
Also, banks will be required to declare their profits, turnover, taxes paid and number of employees in every country in the 27 nations in the EU.
Why is this happening?
This comes against the background of a huge financial crisis in 2008, which later fed into the eurozone debt crisis that is still unresolved.
In 2008, some of the world's banks - which had invested in risky financial products - collapsed, including Royal Bank of Scotland, HBOS and Northern Rock in the UK. All were bailed out by the taxpayer at some point. Many banks in Europe also needed to be bailed out, including Commerzbank in Germany and the local "cajas" (savings banks) in Spain.
Later, several countries themselves crumbled until the weight of their huge state debts, including Greece, Ireland, Iceland and Portugal. In particular, Iceland and Ireland got in trouble after taking over the huge debts of their banks to secure the money of depositors. The banks' debts were larger than the states' own GDP.
During the crisis, many banks paid their staff bonuses, despite having been bailed out by the taxpayer. RBS, in particular, came under fire for doing so. Banks have argued they need to pay the market rate to keep staff to revive the banks and protect the taxpayer's investment.
Since then, there has been much teeth-gnashing about what do in order to stop banks needing to be bailed out again.
The international rules known as Basel III, about levels of safe capital that need to be set aside, are one way of doing that.
Another has been a financial transaction tax (FTT), supported by France.
The FTT - set at 0.1% for shares and bonds and 0.01% for derivatives - has been adopted by 11 eurozone states, including France, Germany and Spain, and aims to encourage more responsible trading by financial institutions.
Despite the fact that only a minority of the 27 support it, the European Union's Council of Finance Ministers adopted the proposal in January 2013. The Commission believes it will raise 30-35bn euros (£26-30bn; $40-47bn) a year from it.
But the UK was opposed to adopting it on an EU-wide level.
London is Europe's premier financial centre. For example, one economic forecaster, the Item Club, said that the UK would generate about three-quarters of the revenues from any FTT if it was applied across the European Union.
The banker bonus cap is the latest salvo at attempting to regulate banker behaviour across the whole of the EU.
How does the UK feel about this?
The UK is opposed to a cap on bankers' bonuses.
In fact, the UK has been opposed to almost all regulation being imposed on its banks from outside.
Prime Minister David Cameron said the EU should concentrate on tightening up banks in other ways and said that the UK's own plans were, in fact, stricter on banks than the EU's proposals.
The government is adopting proposals put forward by a commission headed by Sir John Vickers to keep saver and business deposits from being compromised by the more speculative activities typically undertaken by investment banking operations.
London Mayor Boris Johnson reacted more vehemently to the bank bonus plans.
"People will wonder why we stay in the EU if it persists in such transparently self-defeating policies," he said. "Brussels cannot control the global market for banking talent. Brussels cannot set pay for bankers around the world.
"The most this measure can hope to achieve is a boost for Zurich and Singapore and New York at the expense of a struggling EU," he added.
Is this plan legal?
The Lisbon Treaty, signed in 2007 and entering force in 2009, is the latest version of the treaty that creates the EU as an entity and acts as its constitution.
Under the section covering social policy, Article 153, section 5, states that the European Parliament and the Council's (the member states) ability to modify policy in this area "shall not apply to pay".
Robin Chater, the secretary-general of the London-based Federation of European Employers, argues that "what EU negotiators have failed to appreciate is that such an action is beyond the powers vested in the European Union under the EU Treaty".
That suggests that a legal challenge is likely to be mounted by someone, should the rules be passed and become EU law.
Mr Chater adds: "Furthermore, even if the Council's powers were not challenged in this matter, financial institutions would remain free to increase base salaries to reward and retain key staff."
So banks could raise the base salary of bankers and pay them more that way - though that would be subject to the EU regulators' rules on how much can be cash and how much in shares.
What happens next?
It is widely believed that - after the agreement last night - that the adoption of the rules are a formality.
The deal will now be considered by EU finance ministers at a meeting next week in Brussels, but the process is subject to qualified majority voting, so the UK will be unable to veto them.
In terms of the changes becoming law, it must then be approved by member states and the European Parliament. A vote is expected at the latter at its 15-18 April session.
Once approved, all the countries in the EU would need to include incorporate the rules in their national laws by 1 January 2014.