European Parliament lawmakers have moved to cap bonuses on bankers’ salaries, as well as force banks to become more transparent in their operations, in the strictest crackdown on the industry since the global financial crisis of 2008.
Despite dire warnings from bankers and industry lobbyists that the deal would have severe implications for doing business in the European Union, EU legislators agreed late on Wednesday to ban bonuses greater than double bankers’ salaries.
The deal is seen as a way of calming public anger over the financial sector at a time of weak economic performance and high unemployment.
In the high-octane world of banking, where star performers are able to earn bonuses many times greater than their base salary, the legislation attempts to impose some braking mechanisms. Indeed, it represents the strictest move on the industry since the 2008 financial crisis. For example, banks would need to secure shareholder approval to award a bonus that is more than fixed income.
There do appear to be some loopholes in the legislation, however, that may allow bankers to go beyond the set limit. While bonuses that exceed twice the amount of fixed pay would be prohibited, bankers may receive “loss-absorbing securities,” for example shares, according to EU lawmakers. The provision would be granted if the payment of that share of the bonus is deferred for at least five years, they explained.
In addition to taming banker pay at a time when many European
countries are witnessing protests over government austerity
measures, the deal also forces banking institutions to show their
profits on a country-by-country basis starting in 2015.
Meanwhile, EU banking subsidiaries that operate overseas, as well as American or Asian banks working in the EU will also be required to follow the new rules.
According to the Financial Times, the new bonus rules “will probably apply to subsidiaries of Barclays and Deutsche bank in the US, Standard Chartered bankers working in Asia and Goldman Sachs traders based in London.”
The agreement, if confirmed, represents a huge victory for European lawmakers, and opens the door for the passage of the so-called Basel III capital rules, an internationally accepted guideline for preventing another banking crisis.
European MPs remain confident that the tough banking measures will clear the final hurdle.
“I find it difficult to imagine that we would now scrap this compromise,” Michel Barnier, the EU commissioner responsible for spearheading the reforms, said following the parliamentary session that concluded after midnight in Brussels.
Now the deal must be formally endorsed by the majority of EU governments, he said.
US not ready for EU-style bonus ban
European efforts to inject some sanity into an industry that is often portrayed by rampant greed and recklessness, especially in the aftermath of the 2008 global financial crisis, is moving in the opposite direction that the US banking industry is taking.
Despite an increase in redundancies on Wall Street, the remaining bankers are receiving more lucrative year-end bonuses, according to report issued by the New York State comptroller on Tuesday.
It was reported that the average financial industry cash bonus rose to $121,900 in New York, up 8% from the previous year, according to comptroller Thomas DiNapoli. The bonus increase is partly the result of deferred payments from previous years, as well as savings from compensation costs, DiNapoli said.
Many analysts had been predicting in December that bonuses would tumble for a second consecutive year.
"Profits and bonuses rebounded in 2012, but the industry is still restructuring," DiNapoli said. "Despite its smaller size, the securities industry is still a very important part of the New York City and New York State economies."
With net bonuses at $20 billion in 2012, they are still lower than previous years.
In 2010, bankers received $22.8 billion in bonuses, while in
pre-crisis 2006, cash bonuses peaked at $34.3 billion.