The European Parliament Wednesday backed new rules that will limit bankers’ bonuses and reinforce banks’ capital requirements, aiming to reduce risk taking while increasing the availability of funds for the real economy.
In a full assembly vote in Strasbourg, lawmakers approved an agreement reached last week by parliamentary negotiators and representatives of European Union countries, which will now have to give the last, formal green light.
The agreement is telling banks “hold more capital, get your priorities right,” said Arlene McCarthy, the parliament member who steered the legislation through the assembly, at a press conference in Strasbourg. “We want banks to focus not on their own pay and perks, but more on lending and support to economic recovery,” she added.
Citing data from the Bank of England’s Financial Stability Report, McCarthy said that bonuses and capital requirements are closely linked because if banks had paid less in bonuses, they could have generated more money for lending into the real economy.
Under the new rules — part of which will already be in place in January — cash bonuses would be capped at 30% of a total bonus, or 20% for particularly high bonuses. A large part of a bonus must also be deferred so it can be recovered if investments don’t perform as expected, the parliament has said. Bonuses would be linked to salaries, with each bank setting a limit following broad EU guidelines.
Banks would also be required to hold a minimum amount of capital to ensure they are covering risk from their trading book and complex securitized investments, such as mortgage-backed securities, to avoid a repeat of risk-related losses like those seen during the global financial crisis that escalated in late 2008. The capital requirements would take effect in 2012.
While some European countries have already imposed limits on banker bonuses, the new rules set common guidelines for all 27 members of the EU. France and Germany have also effectively set caps by pressing banks to agree to limit executive pay.
The new rules on bonuses “send a strong political message: there will be no return to business as usual,” said Internal Market Commissioner Michel Barnier in a statement.
The new rules would ensure exceptional pension payments are generated as contingent capital, with their final value linked to the strength of the bank. The measures aim to avoid the kind of large severance packages for disgraced departing executives that have caused an outcry in Europe.
Separately, the European Parliament voted with an overwhelming majority to support supervision measures far stricter than what is likely to be palatable to the European Council, which represents the EU’s 27 member states. The agreement of both bodies is needed before the legislation comes into force.
The main sticking point between the two legislative bodies revolves around the level of power to be granted to the new regulatory agencies.
The parliament wants to give three new agencies broad powers over the 27-nation bloc’s banks, securities firms and insurance companies, while the council wants to keep much of this authority with national governments.