European (And US?) Banker Bonuses Capped At Twice Base Salary
Just days before the UK's Barclays bank is set to unveil the number of staff who earned more than GBP1 million last year in its annual report, as part of a push for more transparency, the FT reports that a provisional EU deal - set to go into place in January 2014, will bring the most severe pay crackdown since the 2008 crisis began. European Bankers' bonuses (and their US subsidiaries) are to be capped at two times bankers' salaries and banks will be subject to a strict transparency regime after a late Wednesday European parliament vote secured agreement on a mandatory 1:1 ratio on salary relative to variable pay, which can rise to 2:1 with explicit shareholder approval. With the UK 'threatening' referenda in the future, the deal, if confirmed, is a major victory for the EU parliament negotiators, who insisted on pay curbs as their price for passing Basel; and a sign of London’s relative isolation on some financial services issues. As far as a workaround, the EU commissioner responsible for the reforms, said it was "difficult to imagine now that we would scrap this compromise," though we are sure they will find a way, especially as MEPs want the tougher version eventually to apply to hedge funds and investment managers.
The impact, however, will be partly softened for the City of London by giving more favourable treatment to long-term pay linked to the health of a bank, such as equity or bonds that are written down when an institution fails.
While the deal preserves the freedom for national authorities to require banks to hold more capital, the most important UK priority throughout the negotiation, the remuneration exemptions, fall well short of the London’s demands.
George Osborne, the UK chancellor who led frantic diplomatic efforts to blunt the curbs, must now decide whether to force a debate or a formal vote at a meeting of finance ministers next week.
Senior bankers warned that the pay curbs – which were not part of the Basel accord – will reset the balance of arguments for operating in Europe, with potentially far reaching implications. While average pay levels at banks fit within the ratio, star performers can receive multiples of salary of 10 times or more.
[The Workaround] - As part of the compromise, up to a quarter of variable pay can be issued in instruments deferred for more than five years.
The European Banking Authority will be given the task of determining the type of instruments that win favourable treatment and the discount rate that is used to calculate their value within the ratio.
Industry hopes of an exemption for international offshoots of EU based banks, as well as US or Asian banks operating within the EU, were dashed.
While the threat of a bonus clampdown has been hanging over the City for almost a year, the severity of the overall package will come as a big shock, especially given the lack of significant exemptions.
Banks pleaded with David Cameron, the UK prime minister, to fight the crackdown, warning that it would undermine the City and force banks to move top staff or lucrative operations to New York or Asia.
The reverberations of the cap will be felt beyond the banking sector. MEPs want the tougher version eventually to apply to hedge funds and investment managers, who are subject to existing bonus rules designed for banks.
THE RULEBOOK AT A GLANCE
Capital: There will be an effective minimum core tier one capital ratio of 7 per cent, rising to up to 9.5 per cent for globally systemic banks, by 2019. The definition of capital is also being tightened although not by as much as the global Basel III agreement required. Regulators may also impose countercyclical capital buffers if they believe an economy is overheating.
Liquidity: Banks will be required to keep on hand enough easy to sell assets to survive a 30-day market crisis. The requirement is phased in between 2015 and 2018, a year faster than Basel III requires. The definition of acceptable assets has not been finalised so it is unclear how closely the EU will follow the Basel III rules.
Bonus curbs: A tentative deal is taking shape where bankers’ bonuses exceeding salary will be banned in normal circumstances. Shareholders could raise the ratio to 2:1 or vote to exempt some long-term forms of pay. All banks must disclose the number of staff paid more than €1m.
Flexibility: Member states can ask individual banks to hold more capital. But they are more constrained about raising capital requirements to tackle systemic risks. The UK and Sweden are content with the complex approval procedure but the commission is pushing for a stronger means to intervene.