Bankers in the European Union, who already have the toughest bonus curbs in the Group of 20 nations, may face even stricter pay limits under a draft deal to bolster lenders’ capital requirements and rewrite the bloc’s financial industry rulebook.
European Parliament lawmakers and national government officials agreed to ban bonuses that are more than twice bankers’ fixed pay, in a tentative deal that may end more than 18 months of wrangling over how the EU will apply global bank rules drawn up by the Basel Committee on Banking Supervision.
The deal, which applies to all bankers in the European Union as well as to employees of EU lenders anywhere in the world, means “less money for bonuses and more money for jobs and investment,” Udo Bullmann, the lawmaker leading work on the rules for the parliament’s socialist group, told reporters in Brussels today. “We are going further, we are saying that the bonus system itself must change.”
EU legislators demanded that the law implementing the so-called Basel III pact include curbs on variable pay as part of a quest to reshape lenders as utilities rather than money-making machines. Under today’s deal, which still needs formal endorsement by governments and lawmakers, shareholders would have to approve any bonuses that top salary, by a two-thirds margin or a 75 percent vote if less than half a bank’s ownership is represented.
Prime Minister David Cameron said Britain, which has opposed previous drafts of the pay rules, would study the compromise ahead of a meeting of EU finance ministers next week.
The U.K. raised concerns over the lack of an impact assessment of the planned bonus curbs at a separate meeting of diplomats in Brussels today. Britain also questioned whether the plans are in line with international agreements, according to an EU official, who isn’t authorized to be cited by name.
The draft pay rules would “increase fixed costs at a crucial time of bank restructuring,” Simon Lewis, chief executive officer at the Association for Financial Markets in Europe, said in an e-mail. “This will seriously harm European competitiveness and have a negative impact on the real economy.”
AFME represents international lenders including Deutsche Bank AG, BNP Paribas SA, HSBC Holdings Plc and Royal Bank of Scotland Group Plc.
The bonus restrictions come as some of Europe’s largest banks take steps to reduce variable pay in response to scandals such as rate manipulation or dips in performance.
While bonuses double fixed pay would be banned, the compromise deal would offer banks some leeway on how to apply the measure when parts of the award are deferred.
Some shares and other securities that can face losses in crises wouldn’t be fully counted when calculating whether a bonus exceeds the cap. This special treatment would only apply to securities that couldn’t be sold for at least five years after the bonus is awarded.
“The EU is taking the toughest approach of any major market to date on banker pay,” Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., said in an e-mail. “Banks may be getting a lot of regulatory leeway, but bankers will pay for it in their compensation packets,” she said.
Under the compromise, loss-absorbing securities could be priced at below face value in calculating whether a banker bonus meets the EU rules. These instruments could count for as much as a quarter of a bonus award. EU officials said that the bloc was aiming to introduce the law on Jan. 1, 2014, with July 1, 2014, as a fall-back date depending on how long it takes to adopt and publish the final text.
Bonus awards could be retroactively slashed if a banker was found to have misled the company about his performance.
“Bonuses will still remain quite substantial despite this cap,” Michel Barnier, the EU’s financial services chief, told reporters.
Today’s deal follows calls last year from European Parliament lawmakers for an outright ban on bonuses that exceed fixed pay.
National governments resisted such a move, warning that it could harm banks’ competitiveness and force lenders to increase basic salaries. The U.K. earlier this month advocated an alternative approach in which up-front cash bonuses would be capped, while it would be left to shareholders to set overall limits on variable pay. Bank units based outside the EU would have been exempt from the rules.
Michael Noonan, finance minister for Ireland, which holds the EU’s rotating presidency, said the compromise reached today was “well balanced.” Ireland represented national governments in the negotiations.
“I will be presenting this package to finance ministers when we meet in Brussels next Tuesday and I hope they will endorse it,” Noonan said in an e-mailed statement.
“We’ll look carefully at what the outcome of the negotiations was before working out the approach we’ll take at Ecofin next week,” Cameron told reporters this morning, referring to next week’s finance ministers’ meeting.
“We have major international banks that are based in the U.K. but have branches and activities all over the world, and we need to make sure that regulation put in place in Brussels is flexible enough to allow those banks to continue competing and succeeding while being located in the U.K.,” Cameron said, according to an e-mailed copy of his remarks.
Othmar Karas, the parliament’s lead lawmaker on the rules, said the bonus curbs would apply to units of EU banks situated beyond the EU’s borders and also to units of non-EU banks located in the bloc, with “no exceptions.”
The impact on recruitment of extending the bonus curbs to EU banks’ overseas units will be reviewed, according to EU officials.
The deal will put EU banks “at a major disadvantage in the global market,” Alex Beidas, an employee-incentives specialist at lawfirm Linklaters LLP, said in an e-mail. “There is a real danger that this will result in bankers moving to the U.S. and Asia.”
The Parliament plans to vote on the measures in April, Karas said, adding that he expected “full agreement” from governments on the deal that was reached.
The accord on the Basel capital rules means the EU may overtake the U.S. in its progress toward implementing the international standards, which were published in 2010 in an effort to prevent any repeat of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.
Regulators on both sides of the Atlantic missed a January deadline to begin legally phasing in the Basel III measures, which more than triple the core reserves that lenders must hold against possible losses.
EU Parliament lawmakers also secured an agreement that banks should be forced to publish the profits they make and taxes they incur, broken down by each country in which they operate, officials said after the deal. The European Commission plans a review before the measure takes effect to assess the possible impact on lenders, they said.
Luxembourg raised concerns about this part of the accord at the meeting of diplomats in Brussels that followed the overnight talks.
To reach a deal, negotiators added to and amended plans from the Basel committee, which drew up the international standards as part of its efforts to bring together banking regulators from 27 nations including to the U.S., U.K., and China to coordinate their rule-making.
Today’s agreement on bonuses adds to a previous round of EU banker pay rules, which took effect in 2011. The earlier measures limit bankers to receiving about 25 percent of their bonuses in immediate cash payouts, with the rest of the cash component deferred for a minimum of three years. The standards also require bonus awards to be split between shares and cash.
“The existing EU remuneration rules are already the toughest in the world,” Beidas said.
“It is clear when you review all the rules alongside each other that the EU set the high watermark in 2011,” she said.
The Basel committee warned last year that the EU’s implementation of Basel III may not be faithful to the global accord. The group said the EU may not apply sufficiently strict rules to banks with insurance arms, or set tough enough rules on the definition of what securities count as capital.
The deal is not “Basel compliant,” Vicky Ford, the lawmaker working on the rules for the parliament’s conservative group, told reporters. Still, “it could have been an awful lot less compliant,” she said.