EU Seeks New Curbs to Cap Bank Bonuses

Bankers’ bonuses across Europe would be capped at no more than their fixed salaries under strict new curbs sought by senior lawmakers in response to continued public anger over financial sector pay.

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In a sign that Brussels is hardening its stance on banker pay, European Union parliamentarians are drawing up new caps on bonuses to be included in the bloc’s latest bank capital rules.

The move comes as research from the pan-EU banking regulator reveals huge disparities in bonus sizes across the region and big differences in enforcing existing EU pay rules, which limit the upfront cash portion of a bonus to 25 percent of the total.

The European Banking Authority survey found that the median average ratio of bonus to salary across the block was 122 percent for executives and 139 percent for other risk-takers, such as traders. But one country reported an average ratio of 313 percent for traders and one institution had a ratio of 429 percent for executives and 940 percent for other staff.

European members of parliament have tabled dozens of remuneration amendments to planned legislation to implement the Basel III international bank capital rules.

In an indication of where this legislative activity may lead, Othmar Karas, the parliament’s lead negotiator, on Thursday signalled that a “one-to-one” bonus ratio is likely to be a key demand in talks with EU member states. To be enacted, any pay rules would need to be agreed with those states, which are generally more cautious about rigid restrictions. But one industry lobbyist warned the current political climate will make any new initiatives “hard to resist”.

Michel Barnier, Europe’s top financial regulator, is encouraging the MEPs to take a hard line on the issue. He told the FT the EBA report made for “startling reading”.

“I cannot see how some of the ratios included in the report of variable to fixed remuneration can ever be considered justifiable or a sensible way to manage risk and long-term interest,”
he said. “It is proof once again that tougher action is necessary.”

A fixed cap on bonuses would be resisted by Europe’s main financial centers, chiefly London. “If they do put caps in, this could have disastrous unintended consequences. It could result in significant increases in fixed pay,” said Jon Terry, global head of human resources consulting at PwC. “It substantially affects the flexibility of the business.”

EU-wide limits, adopted in 2010, on upfront cash payments are supposed to apply to top managers and anyone else who can have a significant effect on the bank’s business. The EBA found that 10 percent of bank employees are caught by deferral rules in some countries but fewer than 1 percent in others.

The EBA declined to reveal each state’s category.