EU officials approved a draft of measures late on February 27 aimed at reducing risk in the bloc's banking sector. The restriction on banker's bonuses, new capital requirements, and enforced increase in transparency are likely to be introduced from the start of next year.
Under the deal, thrashed out by the European Parliament, European Commission and member states, bankers' annual bonuses cannot normally exceed their annual salaries, while banks must hold more high quality capital to increase stability in the sector. The only possible exception, allowing bonuses of up to twice annual salary, would have to be authorised by a 65% quorum of stockholders with at least a 50% stake in a bank.
Reflecting the widespread anger across Europe at the banks due to their role in the ongoing crisis - as well as several scandals since it started - the basic salary-to-bonus ratio for bankers will be 1:1. That could be raised to a maximum of 1:2 with the approval of the quorum. Votes representing at least 75% of shares will be needed without a quorum. "To encourage bankers to take a long-term view," says the European Parliament in a statement, "if the bonus is increased above 1:1, then a quarter of the whole bonus would be deferred for at least five years."
Banks in the EU will also have to raise their reserves as a cushion against future shocks under the deal. Minimum thresholds of high quality capital to be retained will be raised, with tier 1 capital ratio requirements at 8%.
In addition, Europe's bankers will be forced to increase transparency hugely. The legislation will require banks to disclose profits, taxes and subsidies on a country by country basis, as well as turnover and number of employees. From 2014 these should be reported to the Commission and from 2015 made fully public.
"For the first time in the history of EU financial market regulation, we will cap bankers' bonuses," said Othmar Karas, the European Parliament's chief negotiator. "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 and jobs."
The agreement was reached during eight hours of intense talks in Brussels between members of the European parliament, the European Commission and representatives of the bloc's 27 governments, with the UK failing in its bid to rally opposition. Not surprisingly, the EU country with by far the biggest financial sector claimed that the new regulations would damage investment and jobs in the EU, and drive up costs.
The deal still needs formal endorsement by governments and lawmakers. It will be presented to finance ministers in Brussels next week, and the European Parliament plans to vote on it in April.
It is widely assumed that approval will follow swiftly. Once it does, member states would need to include the rules in their national laws by 1 January 2014, the European Parliament statement says, although according to Bloomberg, EU officials have July 1 as a fall-back date depending on how long it takes to adopt and publish the final text.
The deal also paves the way for the introduction of the Basel III overhaul of banking rules, which the G20 had originally planned to bring in last month. However, that has been delayed to January. Basel III will raise tier 1 requirements to 9%.
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