Bloomberg News

Bank Bonus That Tops Salary May Be Banned by EU Lawmakers

April 12, 2012

Lawmakers in the European Parliament may seek a ban on banker bonuses that exceed fixed pay as part of a draft law on Basel capital rules.

“We are looking at a set limit” on the size of bonuses compared with fixed salary, Othmar Karas, the lawmaker leading work on the rules, said at a meeting of the body’s economic and monetary affairs committee. This limit should be set at “100 percent, so one-to-one,” he said today.

Karas said he’s seeking a deal between the legislature’s different political groups as part of a compromise on the draft law. He had previously suggested finance workers’ bonuses be capped at twice their base pay.

Some bankers are receiving bonuses about 10 times larger than their base salary, according to a European Banking Authority survey released today. The ratios of variable to fixed pay that lenders use “tend to be high” and “the criteria by which institutions decide on the ratios in practice are not always clear,” the EBA said.

Michel Barnier, the EU’s financial services chief, has said he is considering proposing extra rules on bonuses in response to payouts that go against “all reason, common sense and morality.”

Karas’s proposal would have the EU move to reduce payouts faster by including the measures in the draft Basel bank-capital law, which is scheduled to take effect on Jan. 1.

Bonuses Trimmed

Labor leaders and politicians have criticized bank-bonus awards as out of touch with economic reality. Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester this year waived his 963,000-pound ($1.5 million) bonus after the U.K.’s opposition Labour Party said it would ask the national Parliament to vote on the award at the bailed-out lender.

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

The agency’s predecessor, the Committee of European Banking Supervisors, set bonus rules in 2010 that limited upfront cash payouts to about one quarter of the total bonus to ensure incentives were linked to the long-term performance of the firm. The EBA has called on lawmakers to grant it the power to better identify risk-takers whose behavior bonus rules should target.

Capital, Liquidity

Global regulators on the Basel Committee on Banking Supervision agreed in 2010 to toughen capital and liquidity rules for lenders in response to the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. (LEHMQ:US) The plans, known as Basel III, would more than triple the core reserves lenders must hold to absorb losses.

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

“Underneath the EU suggestions is a fundamentally different view of banking as less capitalism and more utility,” Hahn said in an e-mail. The proposal makes the strong suggestion that if you get paid more than a certain amount, “you are probably doing something or taking more risk than the EU wants in a bank.”

Karas’s proposal to cap bonuses must be approved by parliament and national governments before it can become law. The committee is scheduled to vote on it April 25.

‘Conflict’ Coming

“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. Both Bullmann and Philippe Lamberts, who negotiating for the parliament’s Green group on the legislation, are backing the proposal.

Financial firms worldwide have been giving in to pressure to limit bankers’ compensation in response to the credit crunch.

Bank of America Corp. cut Chief Executive Officer Brian T. Moynihan’s compensation for 2011, granting him no cash bonus and freezing his salary, a person briefed on the matter said in February. Deutsche Bank AG told employees it will impose a 200,000-euro ($263,000) cap on bonuses this year, three people with knowledge of the discussions have said.

Lawmakers are also seeking a compromise on how much freedom national regulators should have to force their banks to hold more capital than required by the EU.

A possible compromise, Karas said, would be that individual nations could impose capital surcharges on so-called systemically important banks that would roil markets if they failed.

The Basel committee brings together banking regulators from 27 nations including the U.S., U.K. and China. Its rules must be written into national laws before becoming enforceable. The EBA was set up by the European Commission last year to harmonize bank rules across the region’s 27 member states.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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