Blow for City as Brussels agrees banker bonus caps

Bankers in Europe face a cap on bonuses as early as next year, following agreement in Brussels to introduce strict new curbs, in a move politicians hope will address public anger at financial sector greed. 

 

The agreement, announced by diplomats and officials after late-night talks on Wednesday between EU country representatives and the bloc's parliament, mean bankers face an automatic cap on bonus payouts at the level of their salary, or two-times pay if a majority of shareholders vote in favour.

But it represents a setback for the British government, which had long argued against such absolute limits. The City of London, the region's financial capital with 144,000 banking staff and many more in related jobs, will be hit hardest.

David Cameron said that he would "look carefully" at the proposed new regulations while defending the UK's position as an international financial hub.

"We have major international banks that are based in the UK but have branches and activities all over the world," said the British prime minister. "We need to make sure regulation put in place in Brussels is flexible enough to allow those banks to be competing and succeeding while being located in the UK."

Othmar Karas, the Austrian lawmaker who helped negotiate a deal, 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, namely financing the real economy, that of small and medium-sized enterprises and jobs."
Such limits to bankers' pay, which is set to enter EU law as part of a wider overhaul of capital rules to make banks safer, will be popular on a continent struggling to emerge from the ruins of a 2008 financial crisis.
Ireland, which holds the rotating EU presidency and negotiated what it called a "breakthrough", will now present the agreement to EU countries. The backing of a majority of EU states is needed for the deal to be finalised.
"This overhaul of EU banking rules will make sure that banks in the future have enough capital, both in terms of quality and quantity, to withstand shocks. This will ensure that taxpayers across Europe are protected into the future," said Ireland's Finance Minister Michael Noonan, who led the negotiations for 27 governments.
The change in the law will be introduced as part of a wider body of legislation demanding banks set aside roughly three times more capital and build up cash buffers to cover the risk of unpaid loans, for example.
The backing of a majority of EU states is needed for the deal to be finalised. One member of the European parliament privately signalled that the deal could yet change, pointing to the "reservations" of some EU countries.
Many in banking argue that reform will do little to lower pay in finance, where head-hunters say some annual packages in London approach £5m.
"If the cap is implemented, it could result in significantly more complex pay structures within banks as they try to fall outside the restrictions to remain competitive globally," said Alex Beidas, a pay specialist with the law firm Linklaters.
An earlier attempt to limit bankers' pay with an EU law forcing financiers to defer bonus payments over up to five years merely prompted lenders to increase base salaries.
But it would be harder for banks to raise base pay this time around. The bonus rules will come as part of wider legislation setting higher capital standards for banks, increasing their costs and curbing freedom to raise salaries.