Bankers' bonuses in the EU could be capped at 30% of their salaries, rising to as much as 20% for higher salary bands, according to a possible deal struck by MEPs and EU member states late on Tuesday evening (29 June).
"Bankers showed that in spite of the crisis they are not able to show self-restraint. This law will do it for them," Arlene McCarthy, the European Parliament's rapporteur for the EU's Capital Requirements Directive III (CRD III), which includes pay rules, told reporters.
UK Liberal Democrat MEP Sharon Bowles, chair of the Parliament's economic and monetary affairs committee (ECON), told an audience at the European Business Summit yesterday (30 June) that she believed MEPs had finally clinched a deal on long-awaited legislation for bank capital requirements.
Though the news was hailed as a victory by the European Parliament, it still needs the approval of a majority of MEPs at their July plenary session and the signatures of EU finance ministers at their next summit in Brussels.
Policymakers in the EU and the US agree that high bonuses give bankers an incentive to take undue risks without the certainty of good returns.
The possible EU deal should put a stop to bonuses either matching or exceeding salary and would also peg bonuses to actual performance. That is, if a deal falls short of its targets, bonuses can be clawed back by the company.
In addition, banks that have received state aid will have to impose further limits on managers' bonuses while directors will receive no bonus unless the national supervisor says otherwise.
Bonus-like pensions will also be included to prevent "bankers walking away from disaster with an enormous cash pension pot," McCarthy added.
Bowles said the legislation should affect this year's pay-outs, while diplomatic sources say the new rules will probably come into effect in January.
Other diplomatic sources who are not very keen on the deal argue that banks will simply raise salaries to make up for any losses on bonuses.
The CRD III – because it is the third of its kind in four years – should also pave the way for stricter capital requirements at Europe's banks.
The new rules will ask banks to have at least three to four times more capital on their books to cope with potential losses down the road, especially in sovereign debt markets.
Once the ink has dried on CRD III, policymakers will have to face another round of amendments – CRD IV – which according to its authors in the European Commission will encompass liquidity standards, definition of capital, leverage ratios, counter-party credit risk, counter-cyclical measures, and systemically important institutions and lastly a single rulebook on all of the above.
In March, MEPs complained about a "piecemeal" trickle of capital rules coming out of the EU executive and demanded that the Commission give them more information about their talks on capital requirements with the Basel Committee, the global banking policy body (EURACTIV 01/03/10).