EU lawmakers approve tough caps on bank bonuses

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The European Parliament approved the world's toughest curbs on bank bonuses yesterday (7 July) as part of wider efforts to limit risk in a sector shored up by taxpayers. .

EU finance ministers are set to endorse the new law next Tuesday (13 July). The curbs will take effect from the start of next year so that only 30% of a bonus can be paid up front, with the rest deferred by up to five years.

The bloc's financial services chief, who drafted the law, said the new rules would send a strong political message to banks.

"There will be no return to business as usual. The EU is leading the way in curbing unsound remuneration practices in banks," EU Internal Market Commissioner Michel Barnier said in a statement.

"Banks will need to change radically their practices and the mentality that has led in many cases to excessive risk-taking and contributed to the financial crisis," he said.

The EU assembly voted by 625 in favour of the new law, with 28 against and 37 abstentions.

The new rules also force banks to set aside more capital against repackaged securities held on their trading books.

The aim is to learn from the financial crisis when the value of securities linked to defaulting home loans crashed, forcing governments to step in with rescue packages.

"It's good news. From 1 January, the bonuses of bankers will be curbed," French Green Party member Pascal Canfin said.

Austrian centre-right lawmaker Othmar Karas said: "We want to make sure that bonus payments don't support risk taking but dampen it."

Arlene McCarthy, the British Labour MEP who steered the measure through the Parliament, said governments and taxpayers had bailed out the banks with 3.9 trillion euros of support but banks had failed to take appropriate action.

"Despite the claims by banks that they have learned lessons, they have actually increased salaries and bonuses as a proportion of revenues," McCarthy said.

Tougher trading book capital rules from the end of 2011 will also ensure the whole banking sector can withstand shocks better in future, Barnier said.

"The tougher capital requirements for banks' trading books and their investments in securitisations – the kind of highly complex products that have caused huge losses for banks – will ensure that banks hold significantly more capital to cover their risks," he said. 

(EURACTIV with Reuters.)

"The requirements on pay and bonuses send a strong political message: there will be no return to business as usual. The EU is leading the way in curbing unsound remuneration practices in banks. Banks will need to change radically their practices and the mentality that have led in many cases to excessive risk-taking and contributed to the financial crisis," said EU Internal Market Commissioner Michel Barnier, commenting on the vote in the European Parliament.

Stuart Fraser, policy chairman at the City of London Corporation, said in a statement: "Banks in the UK have already gone to great lengths to voluntarily meet Basel and G20-agreed standards – indeed many institutions claim the FSA’s requirements are tougher than the new EU rules – and the fact that other countries in the EU are going to follow our lead is to be welcomed." 

UK Tory MEP Vicky Ford, Conservative spokesperson for economic and monetary affairs in the European Parliament, issued a statement saying "national governments must ensure that this directive is transposed proportionately, rather than in a heavy-handed way".

"Risk takers must put the long-term interests of their bank and their customers ahead of their own personal bonus. We need our banks to lend money - but we also need them to make prudent calculations regarding the risks they are taking with customers' money," she added.

EU rules on capital requirements are designed to protect savers and investors from the risk of the failure or bankruptcy of banks. They ensure that these institutions hold a minimum amount of capital. 

The Capital Requirements Directive, adopted in 2006, has just been amended by the EU institutions (EURACTIV 07/05/09) and is currently under review again following the financial crisis.

Specifically, the European Commission has been working on a legislative proposal aimed at introducing tighter standards to assess the impact on capital requirements of remuneration and securitisation in the banking sector.

  • 13 July: EU finance ministers to vote on Parliament decision.

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