Bonuses Under Threat in EU Vision of Banks as Utilities
Bankers face a backlash from European Union lawmakers determined to cut their bonuses as part of a quest to reshape lenders as utilities like water and electricity providers rather than money-making machines.
The European Parliament is proposing an array of amendments to a draft law implementing capital rules by the Basel Committee on Banking Supervision to attack the bonus culture legislators partly blame for bringing the region’s economy to the brink of collapse. A vote is set for May 8.
“A majority” of members “have had enough of banks living on a different planet than everyone else,” Sharon Bowles, chairwoman of the assembly’s economic and monetary affairs committee, said in an interview. “I think it’s more than that though -- we want to change banks’ behavior.”
Public outrage and shareholder rebellions have already led some banks to limit payouts. Barclays Plc (BARC) Chief Executive Officer Robert Diamond said last week that he will forgo about 11 percent of his total compensation until the bank improves profitability in a bid to placate investors opposed to his pay package. His move follows a decision by Citigroup Inc. (C) shareholders to reject that bank’s executive pay plan.
Lenders have struggled to find winning counter arguments to the EU parliament’s plans, with lawmakers insisting that the tougher requirements are a cornerstone of their position on the draft Basel law.
The European Banking Federation, a Brussels-based group that lobbies EU decision makers concedes that changing the minds of politicians will be “difficult.” The debate “is more emotional than rational,” the federation said in an e-mail. “It is a highly political issue.”
Among the dozens of amendments sought by members of the parliament is one by Othmar Karas, the Austrian Christian Democrat lawmaker leading work on the draft rules in the assembly, to ban bonuses that exceed a banker’s salary.
Karas toughened his earlier suggestion of capping bonuses at double fixed pay as part of a proposed compromise among the parliament’s different political groups.
The stricter approach has cross-party support, said Philippe Lamberts, a Belgian who’s representing the parliament’s Green group in the negotiations.
Other parliamentarians have said maximum pay for bankers shouldn’t be more than four times as high as that of the chief of their national watchdog, or more than three times as much as the salary of their nation’s head of government -- such as the 142,500 pounds ($230,000) made by the U.K. Prime Minister David Cameron.
What parliament is doing “is much more sophisticated than simple banker bashing,” said Bowles, a member of the U.K. Liberal Democrats, which is part of the coalition government with Cameron’s Conservatives.
UBS AG (UBSN) will base Chief Executive Officer Sergio Ermotti’s bonus on a wider range of criteria than profitability, including his progress in restoring the reputation of Switzerland’s biggest bank, Chairman Kaspar Villiger said in an interview last week.
Ermotti’s predecessor, Oswald Gruebel, left last year after the bank uncovered a $2.3 billion loss from unauthorized trades.
Ermotti joined UBS last April and took over as CEO after Gruebel resigned. He received 6.35 million francs ($7 million) last year, including 1.39 million francs in base salary, Zurich-based UBS said in its 2011 annual report, published last month.
Michel Barnier, the EU’s financial-services commissioner, has said some payouts to bankers go against “all reason, common sense and morality.”
Barnier, who is responsible for draft legislation, has promised to consider proposing extra rules on bonuses.
The parliament may beat him to it by including the curbs in the EU’s draft Basel bank-capital rules, which are scheduled to become law across the 27-nation bloc on Jan. 1.
Lawmakers insist that the restrictions belong in the draft Basel law, whose core purpose, they say, is to curb excessive risk taking and turn banks into more solid anchors of the broader economy.
Sony Kapoor, managing director of policy advisory firm Re-Define, said it is right for legislators to act.
“Hard bonus caps are the only way to address the imbalance between upside and downside that individual risk takers in banks face,” Kapoor said in an interview.
Another step could be to limit banks’ total pay pools to “a percentage of revenue,” he said. This “would make it hard for them to inflate base pay to unreasonable levels.”
Banks have argued against the curbs, warning that they may threaten deeper EU goals of international competitiveness and a stable financial system. They may also scare away talent.
The Association for Financial Markets in Europe, a group representing lenders including Deutsche Bank AG (DBK) and BNP Paribas SA (BNP), has told lawmakers that the curbs are likely to force banks to increase fixed salaries, making it harder for banks to respond to a “stressed situation” or falling revenue by reining in costs.
“Such an approach would run counter to the overriding objectives of financial stability and economic growth,” the group said in a letter to the EU assembly this month.
City of London
The City of London Corporation, which represents the capital’s biggest financial district, said this month that Europe can’t afford to “drive away” the best and brightest minds by giving the impression it doesn’t welcome high earners.
“We should be wary of unintended consequences when it comes to bringing in pay legislation,” Stuart Fraser, the City of London policy chairman, said in an e-mail. “Banks have cut tens of thousands of jobs, partly due to the movement away from flexible bonuses to higher fixed-salary costs that was encouraged following the financial crisis.”
Still, attempts to limit the ratio of bonuses to fixed elements of pay may be welcomed by many bankers, said Simon Gleeson, a financial-services lawyer at Clifford Chance LLP in London.
“It’s the ‘Banker Enrichment Act,’” Gleeson said in an interview. “You’re telling them 50 percent of your next bonus is guaranteed, not just next year but for the whole career, and you’ll receive it in cash. I’d be surprised if bankers weren’t lobbying for it.”
Limits on the share of bonuses may lead to “some salary inflation.” Bowles said. “But I don’t think it will totally compensate for the reduced bonus payments.”
“It will make banks face up to what they are paying and ask whether they want to do this on a permanent basis,” Bowles said. “Shareholders and investors will ask questions about whether it’s right.”
The draft Basel law must be agreed to by the parliament and by national governments before it can take effect.
Governments are scheduled to agree on a negotiating stance at a May 2 meeting of finance ministers, who have yet to signal whether they will support the bonus curbs. The parliament’s economic and monetary affairs committee will vote on May 8.
Denmark, which holds the EU’s rotating presidency, must then try to broker a deal between governments and the parliament on the final version of the law.
When the law finally enters the EU’s statute books, Lamberts said he’s seeking a return to the days when banks served the economy, rather than the other way around.
Banking is a “very important industry,” the Green lawmaker said in an interview. “It’s just that it’s not more important that other utilities like energy and water.”
To contact the editor responsible for this story: Anthony Aarons at email@example.com