European Union (EU) leaders have agreed a provisional package of financial measures that include subjecting banks to a strict transparency regime and a cap on bankers’ bonuses of one years’ salary, which can rise to two years only if shareholders’ approval is secured.
The proposed new legislation would
require banks to disclose profits made, taxes paid and subsidies received
country by country, as well as turnover and number of employees. From 2014
would be required to be reported to the European Commission (EC) and from 2015 made fully public. It would also raise the minimum
thresholds of high quality capital to be retained, with banks required to
hold a minimum of 8% good quality capital – mostly Tier 1, the lowest-risk form.
The agreement was reached after an eight hour negotiating session between EU politicians, the EC and representatives of the region’s 27 governments in Brussels, despite UK opposition to the bonus cap, which the government regards as detrimental to the City of London as a major financial centre.
“This overhaul of EU banking rules will make sure that banks in the future have enough capital, both in terms of quality and quantity, to withstand shocks. This will ensure that taxpayers across Europe are protected into the future,” said Ireland’s finance minister Michael Noonan, who led the negotiations.
Othmar Karas, the European Parliament’s (EP) chief negotiator, added: “For the first time in the history of EU financial market regulation, we will cap bankers’ bonuses.
“The essence is that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business, namely financing the real economy, that of small and medium-sized enterprises [SMEs] and jobs.”
However, the agreement was attacked by the Federation of European Employers (FedEE), which claimed that any move to curb bankers’ pay exceeded the EU’s powers.
FedEE secretary-general Robin Chater, who is a former adviser to the EC, commented: “What EU negotiators have failed to appreciate is that such an action is beyond the powers vested in the European Union under the EU Treaty. Article 153 (5) of the treaty clearly states that EU legislative powers shall ‘not apply to pay’. Furthermore, even if the council’s powers were not challenged in this matter, financial institutions would remain free to increase base salaries to reward and retain key staff.
“What politicians and bureaucrats have always ignored is that high remuneration levels in the financial sector – and especially substantial variable payments – serve to minimise fraud levels, retain talent, drive high performance and encourage continuity of employment. That is why corruption is so rife in many states where senior banking staff are badly paid.”
London’s mayor, Boris Johnson, commented: “People will wonder why we stay in the EU if it persists in such transparently self-defeating policies. Brussels cannot control the global market for banking talent. Brussels cannot set pay for bankers around the world.
“The most this measure can hope to achieve is a boost for Zurich and Singapore and New York at the expense of a struggling EU.”
However, the agreement received a friendlier reception from Cass Business School, where Andre Spicer, professor of organisational behaviour, said curbs on bonuses would force banks to rethink how they motivate their star performers.
“This could be good news for banks as most of the research suggests large cash bonuses are a very poor way to reward complex tasks. In fact, large immediate cash rewards can actually mean people perform worse. Cutting back on large bonuses could see better decisions being made,” said Spicer
“Some of the alternatives to large bonuses will include longer term incentives which are linked to performance of the institution over five or 10 years. It might include soft incentives such as better working hours, more supportive work environments, more opportunities for self-actualisation and more interesting design of jobs. This could lead to workplaces where bankers are no longer willing to put up with 364 days of stressful work and one good day when bonuses are paid. This will mean banking is likely to be a more attractive job for a wider range of people.
“The cap on bonuses will also mean that banks need to rethink their business models. Until now banks have relied on a few stars in small units of investment banking to make significant chunks of the bank’s profit. Now banks will need to think about ways of harnessing the talent of the vast majority of their employees who don’t receive giant bonuses. This could see the large banks returning to older style banking. But it could also see star performers moving to smaller financial institutions outside the banks, such as private equity or hedge funds.”
According to Martin Dempsey, client director at financial services consultancy Certeco, the debate over banker bonuses is only one element of the “significant regulatory changes” to the banking system that will result from the Basel III regulatory regime. He said that the best time to attempt a radical overhaul of the system was at a time of financial stability.
“Right now we are grappling with the Financial Transaction Tax, partly implemented across the EU with the UK exercising its veto; we’ve got ex members of the [Bank of England] monetary policy committee [MPC] openly bickering about the strategy going forward; [outgoing governor] Mervyn King is being voted down on the MPC looking for more quantitative easing; Paul Tucker, deputy governor is floating the idea of negative interest rates and [incoming governor] Mark Carney is hinting at alternative monetary targets.
“In the midst of confusion and uncertainty, people are latching onto bankers’ bonuses and ignoring the fact that one thing we’ve learnt from the first truly global recession has been the importance of the banks in stimulating recovery through lending.”
Dempsey concluded: “There is no doubt that banking practices need to be reviewed. And part of that is assessing capital requirements. But if banks are going to stimulate economic recovery, we need the best people running the banks, unfettered by political interference and with a clear regulatory pathway laid out for the coming years.”
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