Banks may face tougher bonus curbs including a ban on awards stemming from carry-trade profits on cheap European Central Bank loans under proposed changes to a law on Basel capital rules endorsed by European Union lawmakers.
Lenders should also be forbidden from giving staff bonus awards that exceed fixed salaries, in the proposals approved by members of the European Parliament’s economic and monetary affairs committee in Brussels yesterday. The amendments will be part of the EU assembly’s negotiation position in talks with governments on the legislation.
“The parliament has taken a firm line on variable remuneration,” Sharon Bowles, chairwoman of the committee, said in an e-mail. “It is clear that these ultra-high levels of remuneration cannot continue, as indeed recent shareholder votes are beginning to show.”
Lawmakers and governments in the 27-nation EU face a January deadline to implement an overhaul of bank capital and liquidity rules agreed on by the Basel Committee on Banking Supervision in the wake of the 2008 collapse of Lehman Brothers Holdings Inc. The rules would more than triple the core reserves that lenders must have to protect themselves from risk, and would force banks to hold a minimum amount of easy-to-sell assets to survive a credit squeeze.
Limiting the proportion of bonuses in compensation “intrudes on the important role of shareholders to determine key questions on pay and commercial strategy,” Simon Lewis, chief executive of the Association for Financial Markets in Europe, said in an e-mailed statement. “It could also introduce additional fragility to the European banking system by increasing banks’ fixed costs.”
The EU legislators voted to add the ECB loan and bonus rules to a draft implementing law presented last year by Michel Barnier, the EU’s financial services chief. The final version of the law must be negotiated between the parliament and national governments. The first round of talks is scheduled for May 23, Bowles said after yesterday’s vote.
The ECB has flooded financial markets with more than 1 trillion euros ($1.29 trillion) of cheap loans to prevent credit markets from freezing up. ECB President Mario Draghi has left open the option of further stimulus if the region’s economy continues to deteriorate. The interest on the loans is tied to the average benchmark rate, currently at 1 percent, over the maturity of the loan.
The carry trade involves investors borrowing money at a lower interest rate to buy higher yielding securities. Aside from the bonus restrictions, the parliament is also seeking to force lenders to disclose their profits derived from the carry trade using the ECB loans.
Finance Ministers Clash
Yesterday’s vote is being followed today by a meeting of the region’s 27 finance ministers who failed to reach a deal on the dossier during 16 hours of talks on May 2-3.
Ministers have clashed over how much freedom national regulators should have to impose tougher capital rules on their banks than those required in the draft law.
U.K. Chancellor of the Exchequer George Osborne has said that the proposal could prevent the U.K. from fully implementing tougher rules for lenders recommended by a panel led by former Bank of England Chief Economist John Vickers.
Finance ministers will review compromise proposals prepared by Denmark, which holds the rotating presidency of the EU.
Lawmakers in the parliament voted yesterday to give nations some room for maneuver to go beyond the EU-mandated capital levels.
The parliament text offers national authorities “sufficient flexibility within an EU framework,” Bowles said. Nations will be able “to take the necessary action to protect themselves.”
Lawmakers also voted to make other additions to Barnier’s proposals, including that banks should have to prepare so-called living wills indicating how they could be safely wound down if they fail.
Banks would also have to disclose more information on repurchase agreements and their other so-called securities lending activities.
Governments have avoided seeking extra curbs on bonuses in the draft law, saying that the legislation is targeted at improving lenders’ stability rather than tackling excessive remuneration.
Philippe Lamberts, the lawmaker leading work on the rules for the parliament’s Green group, said he expected a tough fight between the assembly and EU government negotiators over the bonus restrictions, which European lenders have warned could make it harder for them to attract top talent.
“We will stand firm,” Lamberts said in an interview. Members of the parliament will “expose” attempts by governments to resist the curbs, he said. “Then we’ll see if they want to be seen defending these people.”
In yesterday’s vote, lawmakers included a so-called safeguard clause that would allow the region to roll back the implementation of the Basel rules if other nations don’t comply with them. They also called on regulators to review and compare the models lenders use to assess the riskiness of their assets, and so calculate how much capital they need to hold.
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