U.K. bankers covered by the European Union’s cap on bonus payouts may get as much as 500 million pounds ($746 million) more in regular paychecks as a result, said Andrew Bailey, Britain’s chief banking supervisor.
Bailey, who will lead the Prudential Regulation Authority when it starts operations next month, told lawmakers in London today that he had “back of the envelope calculations” laying out the effect of the bonus curbs that are part of the implementation of global rules drawn up by the Basel Committee on Banking Supervision.
The European Union brokered a draft deal last month to ban banker bonuses that are more than twice fixed pay, in a move lawmakers said would prevent excessive payouts and curb irresponsible risk taking. The accord, which also sets out how the EU will apply Basel bank-capital requirements, was reached by the European Parliament and Ireland, which holds the rotating presidency of the bloc.
U.K. Chancellor of the Exchequer George Osborne opposed the bonus curbs at a March 5 meeting of EU finance ministers, saying the plans would harm the competitiveness of the nation’s finance industry and drive up fixed salaries. Lawmakers have said that they will resist efforts to water down the pay limits.
“It is expected that salaries will rise,” Alex Beidas, an employee-incentives specialist at law firm Linklaters LLP, said by e-mail. “But banks will want to find other solutions as raising salaries increases fixed costs and reduces flexibility,” she said.
The draft EU rules would grant lenders some limited flexibility to price parts of bonus awards below their market value, when calculating whether they respect the ban on awards worth more than twice fixed pay. This discounting could only be applied to securities that can be written down in crises and that aren’t paid out for at least five years after the bonus is awarded.
“I trust the creativity of global banks that they won’t go down because of this regulation,” German Finance Minister Wolfgang Schaeuble said this week.
“The rules limit the room for maneuver but one can also raise the fixed part of salaries,” he said. “This can be easily solved in global companies which span several judicial zones.”
Irish officials and European Parliament lawmakers are scheduled to meet on March 20 to discuss the draft law.