The European Union will today consider proposals to limit bankers’ cash bonuses to the same level as basic salaries, EU officials said, an attempt to sway Britain’s resistance to a further clampdown on the sector’s huge pay packets.
The G20 recommends that a substantial portion of a bonus is deferred for three years or more with less than half upfront in cash
The proposals, first aired by Germany in August and to be discussed by EU member states and lawmakers from the European Parliament, are the next step in drawn-out negotiations to reach a joint deal on new rules forcing banks to hold more capital.
Policymakers worldwide have made little real progress in limiting huge payouts for an industry that drove the world economy into crisis in 2008 and forced bailouts for which ordinary taxpayers are still picking up the tab.
The EU has tougher bank pay curbs than guidelines laid out by the Group of 20 but some policymakers are still pushing for more steps to be taken.
It will be the first time member states have formally discussed the bonus proposal – which was not part of the original draft measure – and will pit German interests against those of Britain.
Chancellor George Osborne, mindful of London’s status as a financial centre, has previously said he would fight any new bonus caps from Brussels.
Banks have also lobbied against the change, saying the cap could strip them of talented staff. Current rules already force banks to defer up to half the bonus for at least three years.
The European Parliament wants the total of all elements of a bonus to be no more than basic salary, a step too far for some countries, leading to an attempt to seek a middle way.
Two EU officials close to the matter, who declined to be identified, said discussions would include the earlier proposal from Germany to cap only the cash component of a bonus to no more than the banker’s fixed salary.
Lawmakers said any compromise must take into account previously agreed rules, such as clawing back a bonus if a bank gets into trouble. Some critics have already pointed to moves by banks to increase basic salaries, which would weaken the impact of the new rules from the off.
“The new legislation must make sure that the rules we established, to ensure banks claw back bonuses and introduce limits to the cash part, are not undermined,” said Arlene McCarthy, a British Labour politician and one of the European Parliament’s leading lawmakers on the proposal.
Current EU bonus rules are stricter than principles on bank remuneration agreed by G20 leaders by being more specific.
For example, the G20 recommends that a substantial portion of a bonus is deferred for three years or more with less than half upfront in cash. EU rules say only 20 per cent of a big bonus can be upfront in cash.
German Finance Minister Wolfgang Schaeuble’s cash cap might be easier for banks to swallow, because many already pay larger proportions of their bonuses in shares, following a previous EU law which required that bankers get just a quarter of their bonus upfront in cash.
Banks argue that capping bonuses or enforcing bonus/salary ratios would simply push up basic pay to retain staff – something which is already happening – and increase lenders’ fixed costs, making it harder to cut costs in a downturn.
The cap is just one element in a package of rules that implement a global accord, known as Basel III, requiring lenders to triple the amount of basic capital they must hold to weather shocks unaided by taxpayers.
The EU is struggling to agree on many aspects of the package, including what kinds of assets can be considered liquid or quickly available in a crisis.
Schaeuble’s proposal also demands that shareholders approve any long-term incentive schemes before they are announced. Although banks have been lobbying against the caps, some officials say that having regulators set the rules could in fact help them assert themselves against high earners accustomed to substantial bonuses.
Germany’s Commerzbank, which has twice been bailed out by German taxpayers, is appealing an English court ruling that it should pay more than 100 London-based bankers €52 million in bonuses. Lawyers representing the bankers say a €400 million bonus pool was announced to them at Dresdner Kleinwort Investment Bank before it was bought by Commerzbank in 2009.
The bank argues it was both justified and obliged to cut bonuses because the survival of the business was at stake.