Bailed-out bank directors must get no bonuses until banks have repaid public support, bankers' bonuses must be capped at 50% of total remuneration, and bankers' bonus payments should be deferred until profits are actually earned, not just forecast. The rules will be voted in its plenary in July.
New rules to end the bankers' risk-taking culture that led to the global economic crisis were backed by Economic and Monetary Affairs Committee MEPs on Monday evening. Bailed-out bank directors must get no bonuses until banks have repaid public support, bankers' bonuses must be capped at 50% of total remuneration, and bankers' bonus payments should be deferred until profits are actually earned, not just forecast, added the committee. The rules will be put to a plenary vote in July.
The new rules are designed "to deliver a robust and fair remuneration system that encourages long-term stability, not excessive risk taking. The new rules on bank capital will ensure that banks put aside enough money to cover losses on high-risk trading, such as complicated mortgage-backed securities, which they are still holding on their books from before the crisis. It is too much of a risk to leave taxpayers exposed to these potentially toxic assets”, said Arlene McCarthy (S&D, UK), who is steering them through Parliament, before the vote.
Welcoming the result of the vote, committee chair Sharon Bowles (ALDE, UK) said "I want banking to return to the idea that existed in private banks when partners had their own money on the line and had a vested interest in the long-term health of the bank. If bankers and traders want to leave and go to other jurisdictions, it just shows that they do not have confidence in their own performance. To those that would leave I say good riddance.”
Dubbed the "Capital Requirements Directive III" (CRD3), upon which Parliament has equal decision-making rights with the Council, the new rules give legal shape to the recommendations of the Basel Committee, a body of banking supervisors from around the world. Reviewed at regular intervals, this directive updates laws on some of the fundamentals of banking. CRD3 aims to end unsound bonus policies and step up disclosure and capital requirements in areas where speculative activity is common.
Bailed out banks
Under the new rules, banks receiving taxpayer support would not be allowed to pay their directors bonuses to their directors until the public support had been repaid. Directors' salaries at these same banks would also be capped at €500,000.
Bonus/salary balance
MEPs voted to cap bonuses at 50% of a person's total remuneration. This balance between fixed and variable remuneration would give flexibility to bonus policies, including that of paying no bonuses. A significant fixed salary would also reduce the temptation to take risks, they added.
Bonus deferral
Under the new rules, bonuses could not be paid upfront merely on the basis of predicted future profits. At least 40% of a bonus (60% of large bonuses), should be deferred for a period in line with the activities of the trader, and for no less than 5 years. This could be clawed back if the trader performs less well than expected.
Cash bonus crackdown
At least 90% of all income not deferred would be paid as "contingent capital" (funds which can be called upon by the bank in case of difficulties), and retained for at least 5 years. This would align staff incentives with the bank's long-term health and strengthen its capital base. Furthermore, cash bonuses would be limited to a small share (maximum 6%) of the total bonus.
Benchmarking
The new rules would oblige EU and national supervisors to benchmark financial sector remuneration policies, so as to produce a clearer overall picture of remuneration practices Member State by Member State and bank by bank, with a view to pinpointing the potential build-up of risk.
Next steps
Negotiations will now take place between the European Parliament, Council and Commission before the law is finally approved by Parliament as a whole. The plenary vote is planned for July, in Strasbourg.
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