A crackdown on unlimited bonuses for bankers and financial traders was approved today by members of the European Parliament in a move that gives the 27-country European Union one of the world’s toughest regimes in the field.
The new rules are both a response to public outrage at the size of the payouts and a bid to tackle a risk-taking culture blamed for the global financial meltdown.
The EU will require 40 percent to 60 percent of bonuses to be deferred for three to five years. Half of any upfront bonus will be paid in shares or in other securities linked to the bank’s performance so that the money can be recovered if the bank runs into difficulty. Banks that get government bailouts will have to report how many of their employees make more than 1 million euros ($1.26 million).
But while today’s vote rubber stamps measures that were originally agreed to by the G20 nations and European Union member states last month, much will depend on how strictly regulators in individual EU states choose to enforce the rules after finance ministers meet next week to endorse the new regime.
“It’s a directive and leaves some leeway to member states to implement the legislation, having regard to domestic conditions,” explains Philip Whyte, an analyst at the Centre for European Reform, a London-based think tank.
Some nations have already taken steps to curb bank bonuses. For example, Britain levied a 50 percent tax on bank bonuses this past year. And France's Nicolas Sarkozy appointed a pay czar last summer to monitor bonuses paid to financial industry executives and traders. Former French central banker and IMF managing director Michel Camdessus, was given the job of tracking the bonuses of the 100 highest-paid traders at each bank in France.
Banks, hedge funds, and private equity firms will still be able to set the level of bonuses under the measures, which will not come into force until January.
Opposition is also likely to persist from banks that have spent millions on lobbying against restrictions. At a national level, governments such as Britain, whose economy is still particularly dependent on financial services, have been keen to tailor greater regulation to the specific circumstances of the UK.
Mr. Whyte says that his main worry about the new rules concerns what he says is a tendency in some quarters of Europe to believe that all that was largely needed to stabilize financial systems was to curb bonuses and regulate hedge funds.
“I think that there are a lot of very important issues which affect financial stability and which are either being ignored or not reaching the top of the agenda because of some countries,” he says.
Foremost among these issues is the emergence of macro-economic imbalances (trade and budget deficits, for example) and the reluctance of countries such as Germany to concede that its running of large trade imbalances with neighbors had contributed to fragility elsewhere in Europe, such as in Greece.
Nevertheless, today’s vote cheered campaigners for tougher regulation in the banking sector.
Sharon Bowles, a British Liberal Democrat member of the European Parliament, which sits in Brussels and Strasbourg, said that the measures would mean “no more Fred Goodwins” – a reference to the former chief executive of the UK’s Royal Bank of Scotland who was heavily criticized after the bank took a £45.5 billion ($69 billion) taxpayer bailout to stave off its collapse.
“Since 2008, the public has had to put up with seeing top bankers continuing to take home millions in bonuses, while they see their own homes repossessed,” she told reporters after the vote. “This landmark piece of legislation will put an end to the unjustifiable bonus culture as we know it.”