EU Lawmakers Seek Region-Wide Caps On Bank Bonuses

The European Union may set new caps on bankers’ bonuses for all its member nations in its upcoming set of bank capital rules, claimed a report by the Financial Times on Thursday.

The European Union may set new caps on bankers’ bonuses for all its member nations in its upcoming set of bank capital rules, claimed a report by the Financial Times on Thursday.

According to the London-based business newspaper, the move is likely to have been a reaction to a recent study by the European Banking Authority (EBA), which revealed huge disparities in bonus sizes across the region, as well a lack of conformity among member nations on how they chose to enforce existing EU pay rules.

The EBA survey discovered that the median average ratio of bonus to salary across the economic bloc was 122 percent for executives and 139 percent for other risk-takers, such as traders. One unnamed country though reported an average ratio of 313 percent for traders, while a certain financial institution had a staggering ratio of 429 percent for executives and 940 percent for other staff.

The EBA report made for “startling reading,” said Michel Barnier, the European Commissioner for Internal Market and Services and Europe’s top financial regulator.

Barnier is encouraging EU parliamentarians to take a harder line on the issue, and has insisted that, “tougher action is required.”

[quote] “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,” said Barnier to FT.[/quote]

According to Othmar Karas, the leading lawmaker working on the Basel III international bank capital rules, the limit for bankers bonuses compared with their fixed salary could be set at “100 percent; So one-to-one,” he said to Bloomberg.

Karas added that he was trying to seek a deal between the different political groups within the EU, in order to find a compromise on the draft law. If Karas’s proposal to cap bonuses is to become law, the European parliament, as well as national governments, must vote on it by April 25.

“There is going to be a conflict” with governments over the pay curbs, said Udo Bullmann, who is following the law for the parliament’s Socialist group.

Europe’s main financial centres, especially London, would resist a fixed cap on bonuses, added Jon Terry, global head of human resources consulting at PwC.

[quote]“If they do put caps in, this could have disastrous unintended consequences. It could result in significant increases in fixed pay,” said Terry. “It substantially affects the flexibility of the business.”[/quote]

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But Barnier has insisted that the proposal is only a response to bank payouts that go against “all reason, common sense and morality.”

When bonuses dominate bankers’ compensation, it “could incentivize staff to take too much risk in order to assure a certain minimum pay level,” added the EBA report.

Peter Hahn, a professor of finance at London’s Cass Business School and a former managing director at Citigroup Inc, told Bloomberg that, “the financial crisis has changed the debate on banking pay to being ever more emotional and political.”

“Underneath the EU suggestions is a fundamentally different view of banking as less capitalism and more utility,” said Hahn.

The proposal seems to suggest that a banker who gets paid more than a certain amount is “probably doing something or taking more risk than the EU wants in a bank,” he added.