EU to Cap Bankers' Bonuses

The EU is proposing that bankers' bonuses be capped. Can the sound of the tumbrels rolling over European cobblestones be far behind?

Talk about kicking an industry when it's down. Massive layoffs. Capital requirements. Government regulation. Those were bad enough, but truth to tell, smart people with good lawyers can always find a way. The survivors of the latest brush with public interference were still going to be well compensated. But using the words 'bonuses' and 'limits' in the same breath? That is a stake in the heart.

Now, defining who is a banker and what is banking could probably produce some interesting testimony. And the usual threats about moving to Zurich (night life?), New York (visas and real estate prices?) or Shanghai (really...)will be trotted out.

The larger question is what this portends about the economy. We tend to be a 'horse already out of the barn' society when it comes to fixing problems. Which means, in this instance, that the threat of financial ruin has been evaluated and found wanting. Combined with the stories about returning jobs from Asia to Europe and the US, it all suggests that while the concept of balance may still be far-fetched, some alignment is being pursued and possibly even achieved. That suggests politicians are no longer as fearful of retribution as they once were nor as worried about real consequences to the economy.

All of which has to be a bit of a comedown. Because even if these caps are moderated - or never even enacted, there is nothing quite so humiliating as no longer being feared. JL

Alex Barker reports in the Financial Times:

Bankers’ bonuses in Europe would be capped at two times fixed salary under a tentative EU agreement that would mark the most severe crackdown on pay since the 2008 financial crisis.
The European parliament and negotiators for member states drafted a deal in Strasbourg on Thursday that would impose a 1:1 bonus to salary ratio, which can be increased to 2:1 with the backing of a supermajority of shareholders.

The draft terms, which would apply to all banks operating in the EU, will come as a shock to the industry, which was bracing itself for a fixed cap of some kind but was relying on the UK and Germany putting pressure on to relax the limit.

It is unclear whether the proposed compromise will win formal backing. Some diplomats think that Cyprus, which is brokering the deal on bank capital rules on behalf of EU member states, went beyond its mandate and is unlikely to secure approval for such stringent terms.

MEPs nevertheless expressed confidence that a deal on legislation to implement the “Basel III” bank capital accords, which include the restrictions on bonuses, could come as soon as next week.

“An agreement is within reach,” said Philippe Lamberts, one of the lead MEPs in the negotiation. “There is a bonus compromise on the table that the parliament is prepared to go for.

“But it already represents a very considerable concession by the parliament,” he added, referring to MEPs demanding a ban on all bonuses exceeding salary. “This compromise will mean these executives and traders will still be able to treble their base salary.”

The issue of bankers bonuses continues to be a political hot potato as bank chiefs defy political and public pressure to curb payouts
However, other senior figures involved in the talks expressed serious doubts that the list of outstanding issues, including complex rules on capital and liquidity, will be resolved this year. That would mean Ireland will assume responsibility for negotiating the resulting compromise.

Britain will lead calls for the bonus cap to be scrapped or raised significantly. But its strong stand is relatively isolated in the European Council, especially because ministers are reluctant to suffer political fallout from defending the rights of highly paid bankers. A final decision can be taken by majority vote.

Berlin has put out counterproposals that would impose a strict cap on cash payments and looser restrictions on deferred payments. The European parliament, by contrast, is demanding an absolute cap on total pay relative to fixed salary.

One senior eurozone diplomat involved in the talks said many countries had taken the decision to broadly accept whatever compromise was reached in the negotiations with the parliament. “We don’t care about the number, there is no way we are standing up for excess pay,” he said.

Banks warn that imposing such stringent restrictions will force them to increase fixed salaries – a move that could backfire and increase financial risk by detaching performance from pay.