BANK BONUSES
European Parliament agrees new cap on bank bonuses
The European Parliament approved on Wednesday 7 July some of the “strictest rules in the world on bankers' bonuses”. Caps will be imposed on upfront cash bonuses and at least half of any bonus will have to be paid in contingent capital and shares.
The rules do not limit the size of the bonuses that can be paid to bankers, only the proportion that must be paid in cash and shares, and the timing of those payments.
Labour MEP Arlene McCarthy said: “Two years on from the global financial crisis, these tough new rules on bonuses will transform the bonus culture and end incentives for excessive risk-taking. A high-risk and short-term bonus culture wrought havoc with the global economy and taxpayers paid the price. Since banks have failed to reform we are now doing the job for them.”
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New regulations - key elements
Upfront cash bonuses will be capped at 30% of the total bonus and to 20% for “particularly large bonuses”.
Between 40% and 60% of any bonus must be deferred for at least three years and can be recovered if investments do not perform as expected.
At least 50% of the total bonus would be paid as "contingent capital" (funds to be called upon first in case of bank difficulties) and shares.
Bonuses will also have to be capped as a proportion of salary. Each bank will have to establish limits on bonuses related to salaries, on the basis of EU wide guidelines, to “help bring down the overall, disproportionate, role played by bonuses in the financial sector”.
“Bonus-like pensions” will also be covered. Exceptional pension payments must be held back in instruments such as contingent capital that link their final value to the overall strength of the bank. This will avoid situations in which some bankers retired with substantial pensions unaffected by the crisis their bank was facing.
Tougher treatment for bailed out banks
The law will introduce special measures for bailed out banks and it will restrain the overall amounts paid in bonuses, encouraging bankers to prioritise a stronger capital base and loans to the real economy rather than their own pay and perks. In particular, the rules provide that no bonuses should be paid to the directors of an institution unless this is duly justified.
What’s next?
Following the plenary vote, Council will now rubber-stamp the deal, possibly on 13 July. The rules on bonus provisions will then take effect in January 2011.
Want to know more?
Visit the European Parliament web site for more details.
Frequently Asked Questions on the Capital Requirements and Bonuses Package (CRD3)
What did Parliament secure in negotiations on this directive?
Are the remuneration rules binding?
Do the remuneration rules also apply to foreign banks, e.g. from Japan or the USA, that are established in the EU?
Why must cash bonuses be reduced?
Who will decide what a "large" bonus is for the purpose of applying the 30% or 20% cap on up front cash bonuses ?
And what about judging a bank's bonus versus fixed salary policy?
How will bonuses be paid out?
Will the bonus rules apply to all bank employees or only senior people?
Do the remuneration rules also apply to hedge fund managers?
Do the remuneration rules in this directive go beyond what was agreed by the G20?
Which authority will be responsible for establishing the EU-wide guidelines on which banks will establish their bonus limits?
What are the new rules on capital requirements?
When will the rules come into force?
Visit the European Parliament web site for answers to these questions, click here.