Ceiling on bonuses likely to hit London hardest
Bankers in Europe face a cap on bonuses as early as next year, following agreement in Brussels on Friday to introduce what would be the world’s strictest pay curbs, in a move politicians hope will address public anger at financial-sector greed.
The provisional agreement, announced by diplomats and officials after late-night talks between EU country representatives and the bloc’s parliament, means bankers face an automatic bonus cap set at a par with their salaries. That can be raised to twice their pay packet only if a majority of the bank’s shareholders vote in favour. The rules will apply to all banks — American, Asian, Russian or European — based in Europe, and to units of European banks located abroad, so a Deutsche Bank employee working in New York or Tokyo would be subject to the same limits.
Equally, a Goldman Sachs banker in London, Frankfurt or anywhere else in the European Union would be covered. “There will be no exceptions,” said Othmar Karas, the Austrian lawmaker who helped negotiate the deal. “It goes for all banks inside and outside the European Union and for all foreign banks inside the European Union.”
The cap has been somewhat soft- ened by provisions for adjusting the value of long-term non-cash payments to bankers, so that more bonuses can be paid out over time without breaking through the new ceiling.
The limit on bankers’ pay, which is set to enter EU law as part of a wider overhaul of capital rules aimed at making banks more stable, will be popular on a continent struggling to emerge from the ruins of the 2008 financial crisis.
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.
“The United Kingdom is not happy,” said one lawmaker, speaking privately. Ireland, which holds the rotating EU presidency and helped negotiate the deal, will now present it to EU countries. Irish Finance Minister Michael Noonan said he would ask his peers to back it at an EU ministers’ meeting on March 5 in Brussels. The backing of a majority of EU states is needed for the deal to be finalised, so Britain would not be able to block it alone. One member of the European Parliament privately signalled that the deal could yet change, pointing to the “reservations” of some EU countries.
Other measures in the package, including moves to force banks to declare all core assets, remain unresolved. Thursday’s agreement will also require banks to outline profits and other details of their operations on a country-by-country basis, and they face a 2019 deadline to raise their core capital levels. The change in the law is set to be introduced as part of a wider body of legislation, known as Basel III, which demands that banks set aside roughly three times more capital and build up cash buffers to cover the risk of unpaid loans.
Some experts have criticised the EU for failing to stick to all the provisions set out in the Basel III agree- ment, which was drawn up by regulators after the financial crash. A ceiling on bonuses, the only one of its kind globally, is perhaps the most radical aspect of the new rules, and runs the risk of establishing an uneven global playing field that could put European banks at a disadvantage in attracting staff. Udo Bullmann, a German member of parliament involved in the negotiations, said the deal was “revolution in a sector that didn’t have rules any more”.
But many think the reforms will do little to lower pay in finance, where headhunters say some annual packages in London approach £5 million ($7.6 million).