Tuesday

30th Aug 2016

EU rules clamp down on bank 'risk takers'

  • The fall of Lehman bank in 2008 marked the start of years of woe for the EU economy (Photo: sachab)

The European Commission has published rules aimed at making it easier to identify financiers involved in their bank's riskiest trading activities, as part of reforms aimed at capping bank bonuses.

Drafted by the European Banking Authority, the bloc's regulator, and adopted by the EU executive on Tuesday (4 March), the Regulatory Technical Standards, set out 15 criteria to define “material risk takers” in a bank. These cover all senior management staff and those with the power to authorise deals with high credit risk exposure.

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The new rules will also hit executives who earn at least €500,000, or who are in the highest 0.3 percent pay bracket in their firm.

The rules are an attempt to close a loophole which has seen a number of banks award “fixed pay allowances” to their top staff in a bid to dodge an earlier EU bonus cap.

Last month a report by German bank watchdog Bafin found that only four out of 15 banks surveyed had in fact applied the cap.

"Some banks are doing their utmost to circumvent remuneration rules," said financial services commissioner Michel Barnier in a statement on Tuesday.

"These standards will provide clarity on who new EU rules on bonuses actually apply to, which is key to preventing circumvention."

However, millionaire bankers could continue to be exemp from the cap, provided regulators agree they are not involved in any of bank's riskier functions.

"The burden of proof will rest squarely on the institutions to demonstrate that, despite the very high remuneration, the staff member in question does not in fact have any material impact on the institution's risk profile," the new rules say.

EU lawmakers backed the bonus cap reform, which formed part of new rules increasing the amount of capital which banks must hold on their balance sheets, in April 2013. As a rule, bonus payments would be capped at 100 percent of salary, with payments up to 200 percent of salary allowed on the basis of a vote by shareholders.

Legislators argue that a rampant bonus culture encouraged risky trading which resulted in the 2008-9 financial crisis.

But big banks claim the bonus cap risks driving top financiers out of the EU to the US or the Far East. Meanwhile, the UK issued a legal challenge against the legislation last September, claiming it was in breach of the EU treaties and would put European banks at a competitive disadvantage.

The UK is home to more than 75 percent of the 3,500 EU bankers who were paid more than €1 million in 2013.

MEPs and ministers now have up to three months to comment on the rules before they enter into force.

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