The EU will slash all banker bonuses from Jan. 1 after its lawmakers gave the go-ahead on Wednesday to tough new laws aimed at reigning in excessive risk-taking in the financial sector.
After months of negotiations between national governments and the parliament in Brussels, all bonuses awarded or paid across Europe’s financial sector will now have to be broken up under the rules approved by the European Parliament.
The European move — which bankers say could hit the region’s competitiveness — was spurred by a public outcry over lavish pay seen as contributing to the financial crisis of 2007, which pitched the global economy into recession.
“Two years on from the global financial crisis, these tough new rules on bonuses will transform the bonus culture and end incentives for excessive risk taking,” said Arlene McCarthy, who led the negotiations for the parliament. “A high-risk and short-term bonus culture wrought havoc with the global economy and taxpayers paid the price.”
The EU rules mean a far lower proportion of cash in the bonus, far less payable upfront and remaining sums “contingent” on subsequent company performance as well as directly linked to salaries.
To meet the terms of the new law, 60 percent of bonuses should be variable and for future payment only, with “at least 40 percent” of such revenue locked away for three years, the legislative text said.
“The public want banks to prioritize stability and lending over their own pay and perks,” McCarthy said.
“In the last two years, the banks have failed to reform, and we are now doing the job for them,” she underlined in a statement.
Bonus-like pensions will also be covered to avoid “bankers walking away from disaster with an enormous cash pension pot,” the parliament said, adding that special measures will apply for bailed-out banks.
Finally, it said, “new capital rules for re-securitizations and the trading book will ensure banks are properly covering the risks they are running on their trading activity, including for types of investments like mortgage-backed securities that were central to the crisis.”
The new rules are set to be approved at next week’s plenary session of the European Parliament.
The banking community said the measures could reduce the competitiveness of the European financial sector.
“We believe the agreement goes too far, because at the international level, there are already some principles” in the form of recommendations made by the Financial Stability Board, said Guido Ravoet, secretary-general of the European Banking Federation.
“We believe that this is not up to public authorities to put in place figures, percentages,” said Ravoet, who advocates self-regulation by banks. “If the recommendations aren’t followed at the international level, financial centers like New York, Singapore and Hong Kong will benefit.”
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