Bankers' bonuses are to be capped at two times bankers' salaries and banks will be subject to a strict transparency regime, under a provisional EU deal that includes minimal concessions to cushion the most severe pay crackdown since the 2008 financial crisis.
In a serious setback for UK's fight to head-off some of the remuneration curbs, the European parliament late on Wednesday night secured agreement on a mandatory 1:1 ratio on salary relative to variable pay, which can rise to 2:1 with explicit shareholder approval.
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The impact, however, will be partly softened for the City of London by giving more favorable treatment to long-term pay linked to the health of a bank, such as equity or bonds that are written down when an institution fails.
The breakthrough in talks between the European parliament and Ireland, which negotiates on behalf of EU member states, paves the way to enact the so-called Basel III capital rules, an internationally agreed blueprint for avoiding another banking crisis.
The deal, if confirmed, is a major victory for the European parliament negotiators, who insisted on pay curbs as their price for passing Basel, and a sign of London's relative isolation on some financial services issues.
As well as a prized bonus cap, which would go into effect in January 2014, parliament also prevailed in requiring banks to reveal their taxes and profits on a country-by-country basis from 2015, as long as the extra transparency is not judged by the European Commission as an impediment to inward investment.
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Ireland will on Thursday present the draft deal to EU ambassadors, who may decide to ask ministers to approve the final terms. Michel Barnier, the EU commissioner responsible for the reforms, said it was "difficult to imagine now that we would scrap this compromise".
While the deal preserves the freedom for national authorities to require banks to hold more capital, the most important UK priority throughout the negotiation, the remuneration exemptions, fall well short of the London's demands.
George Osborne, the UK chancellor who led frantic diplomatic efforts to blunt the curbs, must now decide whether to force a debate or a formal vote at a meeting of finance ministers next week.
Once formally agreed by parliament and member states, the law will begin the most complex and far reaching overhaul of the banking system since the credit crunch, requiring banks over the next six years to strengthen their buffers of equity and liquid assets to Basel standards.
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Senior bankers warned that the pay curbs – which were not part of the Basel accord – will reset the balance of arguments for operating in Europe, with potentially far reaching implications. While average pay levels at banks fit within the ratio, star performers can receive multiples of salary of 10 times or more.
As part of the compromise, up to a quarter of variable pay can be issued in instruments deferred for more than five years. Crucially the value of this long term pay is discounted, so it has a lower weight within the ratio. In nominal terms, this could increase the ratio significantly above 2:1.
The European Banking Authority will be given the task of determining the type of instruments that win favourable treatment and the discount rate that is used to calculate their value within the ratio.