22 March 2013

ECON Committee: Cap on bankers' bonuses - Risk reducer or witch-hunt?

The new rules are designed to help prevent excessive risk-taking and a future financial crisis. However critics fear it is a counterproductive witch-hunt that will drive investments and bankers out of Europe. ECON committee asked MEPs on opposite sides of the issue if they think the cap will work.

About the agreement

One of the triggers of the financial crisis was the excessive risks taken by bankers in pursuit of large bonuses. These risks may produce short term benefits for banks, but in the long run could lead to credit institutions running up  losses, which in turn would affect society as a whole.

The agreement reached by EP and Council says bankers' annual bonuses must not normally exceed their annual salary, although if shareholders agree bankers could receive up to twice their annual salary. If bankers' bonuses are higher than their salaries, then a quarter of the whole bonus should be deferred for at least five years.This is to encourage bankers to take a long-term view. Banks can claim bonuses back from traders who took risks that turn sour.

The cap on bankers’ bonuses is included in a broader piece of legislation known as the Capital Requirements Directive, which is about increasing stability in the banking sector. Banks will have to set aside higher capital reserves to weather potential new financial storms.

The debate

EP vice president Othmar Karas, an Austrian member of the EPP group, said the new rules were all about creating the right incentives. "A bank manager's value shall be primarily expressed by salary. If additional bonuses exceed the salary by far, the motivation structure of bank employees is distorted. That is why the new provisions not only set a cap on bonuses, but set also new incentives for banks to use long-term bonuses." Mr Karas, who is responsible for steering the Capital Requirements Directive through Parliament, added: "Part of the settlement is also a study to examine whether the cap on bonuses has negative side effects on the banking sector".

However, Martin Callanan, the British chair of the ECR group, does not believe the cap would work as intended: "Bankers should be encouraged to take more long-term orientated decisions. However, a cap on bonuses is the wrong way of achieving it and unless banks find a way to bypass it then the best and the brightest could leave the EU. This is unfortunate because so much of the Capital Requirements Directive was positive for financial services and the real economy."

Sven Giegold, a German member of the Greens, said: "A cap on bonuses can limit excessive risk-taking. In particular if the principle is extended to other financial entities such as investment funds, alternative investment funds and shadow banks". Mr Giegold is responsible for an amendment to the Directive on investment funds, which deals among other things with the remuneration of fund managers. It is another piece of legislation currently being negotiated.

Next steps

The Capital Requirements Directive, which includes the agreement on the cap on bankers' bonuses, must be agreed by Parliament and Member States before it can enter into force by 1 January, 2014.

Press release

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