The European Union has agreed to put a limit on bank executives’ bonuses in the latest effort to curb what is seen as corporate and banking risk taking excess.

Negotiators for the European Parliament and EU states said they reached a preliminary deal on a measure that would forbid bonuses that exceed a bankers’ fixed salary. The UK won a concession that this could increase to twice fixed salary, but only with explicit shareholder approval.

The initiative, part of a broader law that forces lenders to build up more-robust financial cushions, is designed to reduce incentives for the type of risky behavior widely blamed for contributing to the 2008 financial crisis.

The moves in Brussels, if successful, would represent the most prescriptive intervention yet into how banks remunerate employees and executives.

The agreement prompted a response from London Lord Mayor Boris Johnson. According to a report in Reuters, Mr Johnson (presumably anticipating the flight of bankers from London) said “This is possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire.”

 

The EU pay limits would apply to all European banks and foreign banks’ subsidiaries in the EU. Interestingly, the provisions also apply to European banks’ foreign operations.

The regulation will hamper European banks’ ability to hire talented staff and put them at a competitive disadvantage to their counterparts in Zurich, Sydney, New York, Shanghai and Hong Kong and elsewhere.

EU parliament negotiators said that some longer-term bonuses that don’t lead to actual payouts for at least five years may be discounted when the caps are calculated. But that provision, along with several other elements of the deal, will have to be nailed down in another round of talks and could still be rejected by member states.

The negotiators said the new bank rules should come into force on January 1, 2014, provided they get formal sign-off from both the full European Parliament and EU finance ministers, and can be written into national law in all 27 member states in time.

London-based investment banks are looking at ways to lessen the impact of the potential new rules, such as (again) sharply boosting base salaries. Less pay would be deferred and subject to clawback if a bank runs into trouble.

The bonus caps are being introduced as part of EU legislation to ensure banks carry adequate capital cushions in line with the so-called Basel accords agreed by international banking supervisors.

This week’s developments go beyond other prescriptive requirements forced upon banks. In 2011, the EU required banks to defer large parts of bonus payouts three to five years into the future.

The impact on Australian and non-European banks operating in Australia and other non-EU countries could see a range of outcomes:

·         A larger potential pool of top talent willing to migrate for higher potential incentive pay, and/or

·         A reduction in the maximum incentive that can be earned, and/or

·         Higher base pay

See the EU press release HERE.

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