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.
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Industry hopes of an exemption for international offshoots of EU based banks, as well as US or Asian banks operating within the EU, were dashed. The only concession was the promise of the review, led by the European Commission, which will examine the impact of the remuneration curbs two years after implementation.
This means the 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.
While the threat of a bonus clampdown has been hanging over the City for almost a year, the severity of the overall package will come as a big shock, especially given the lack of significant exemptions.
Against expectations, parliament also secured measures to make banks disclose more data about their net income, public subsidies and taxes, broken down country-by-country. The Commission will examine the data of big banks in 2014 and has the right to recommend a delay to implementation if the transparency is shown to significantly hurt the competitiveness of EU companies.
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Banks pleaded with David Cameron, the UK prime minister, to fight the crackdown, warning that it would undermine the City and force banks to move top staff or lucrative operations to New York or Asia.
While the terms of the deal are unlikely to change, if Mr Osborne holds out it will be the first time Britain has been outvoted on a financial services issue, a significant move overturning the informal convention that states are not overruled on law relating to their main national industry.
The reverberations of the cap will be felt beyond the banking sector. MEPs want the tougher version eventually to apply to hedge funds and investment managers, who are subject to existing bonus rules designed for banks.
Philippe Lamberts, the Belgian Green MEP who led calls for the bonus cap, said the measures "will really bring down pay" in the sector. "Otherwise I can't explain the [negative] reaction of the industry," he said.
Vicky Ford, a British MEP who negotiated for the parliament, said that while the bonus restrictions would be "tricky" for industry, key pro-business measures were secured in other parts of the reform. "I hope there can be a workable solution [on remuneration]," she said. "But banks need to look at the whole of the package."
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Othmar Karas, the European Parliament's negotiator said: "For the first time in the history of EU financial market regulation, we will cap bankers' bonuses . . . The essence is that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business."