14th Aug 2020

MEPs drop the axe on bank bonuses

  • Bankers are having their bonuses linked to the performance of their bank (Photo: Wikipedia)

The European Parliament has approved measures to curb bank bonuses, part of a wider series of EU reforms intended to prevent a repeat of the recent financial crisis that has decimated the region's economy.

An overwhelming majority of MEPs voted to support the new measures during a plenary session in Strasbourg on Wednesday (7 July), with 625 votes cast in favour, 28 against and 37 abstentions.

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"A high-risk and short-term bonus culture wrought havoc with the global economy and taxpayers paid the price," said British Labour MEP Arlene McCarthy, who was charged with steering the legislation through parliament. "Since banks have failed to reform we are now doing the job for them."

A political deal reached between parliament and member states late last month means EU finance ministers are also set to give their final approval when they meet in Brussels next Tuesday.

Under the new rules, which will take effect from the start of next year, only 30 percent of a banker's bonus can be paid up front, with the rest deferred for up to five years. For larger bonuses, as defined by national bank supervisors, only 20 percent can be paid up front.

In addition, at least half of a bonus must be paid in a mix of contingent capital - funds to be called upon first in case of bank difficulties - and shares, which must be retained for an appropriate period.

A clawback mechanism will force bankers to return a percent of their bonus if their performance turns out to be less beneficial to the firm than earlier predicted.

By placing the emphasis on longer-term profitability rather than short-term gains, EU lawmakers hope to limit many of the risky activities that undermined bank stability during the financial crisis and forced governments to pour in billions of euros in taxpayers money.

"We want to make sure that bonus payments don't support risk taking but dampen it," said centre-right MEP Othmar Karas.

The new rules, which constitute some of world's toughest in the area, will also see bonuses capped as a proportion of salary, and prevent senior bankers from running off with large pensions despite widespread rot in the firm as a whole.

Capital requirements

As part of Wednesday's vote, banks will also be forced to hold higher levels of capital in order to mitigate against the potential risks posed by trading and re-securitisation activities.

The creation of mortgage-backed securities in the US is considered central to the financial crisis, with studies suggesting the new rules will lead to banks holding three to four times more capital against their trading risk than they do at present.

"The amendments to the Capital Requirements Directive voted today by the European Parliament target the investments and practices that lie at the root of the recent crisis," said the EU's internal market and financial services commissioner, Michel Barnier, after the vote.

"This will make the sector as a whole better able to resist stress," he added.

UK isolated as EU ministers agree bank bonus cap

London has been left isolated in its opposition to bank bonus rules, with EU lawmakers set to agree to cap payments, ignoring last minute opposition from UK finance minister George Osborne.

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