EU pact limits bonus payouts
By Aoife White |
July 1, 2010, Thursday
|
Print Edition
Print Edition
BANKERS will only be able to get part of their yearly bonuses in cash upfront under new European Union rules that will enter into force next year.
A deal announced yesterday between EU governments and EU lawmakers will require banks to limit cash bonus payouts, with most executives only getting 30 percent straight away and the rest paid out later if the company performs well.
The draft rules go to the European Parliament next week, where they are almost certain to win approval after the agreement reached late Tuesday.
The discussion on the caps was launched after a European outcry over payments to executives of banks that had received large state bailouts to avoid collapse during the financial crisis. Some say big bonuses skew incentives in favor of excessive risk-taking.
Starting next January, cash bonuses will be capped at 30 percent of the total bonus and 20 percent for "particularly large" bonuses. The measure leaves it to individual governments to determine what "particularly large" means in their economies.
While some European countries, including Britain, have already imposed limits on banker bonuses, the new rules set minimum caps for all 27 members of the EU. France and Germany have also effectively set caps by pressing banks to agree to limit executive pay.
A large part of the bonus must be deferred, thought it is up to governments to determine for how long. The money will be held as "contingent capital" for banks to call on first if they urgently need funding.
The measure also limits "exceptional pension payments" to avoid the kind of bloated severance packages for disgraced departing executives that have caused public uproar around Europe.
Banks will also be required to hold a minimum amount of capital to ensure they are covering risk from their trading book and complex securitized investments - such as mortgage-backed securities - to avoid a repeat of risk-related losses during the financial crisis. The capital requirements will take effect in 2012.
Global banking regulators are also separately drafting tighter capital requirements.
A deal announced yesterday between EU governments and EU lawmakers will require banks to limit cash bonus payouts, with most executives only getting 30 percent straight away and the rest paid out later if the company performs well.
The draft rules go to the European Parliament next week, where they are almost certain to win approval after the agreement reached late Tuesday.
The discussion on the caps was launched after a European outcry over payments to executives of banks that had received large state bailouts to avoid collapse during the financial crisis. Some say big bonuses skew incentives in favor of excessive risk-taking.
Starting next January, cash bonuses will be capped at 30 percent of the total bonus and 20 percent for "particularly large" bonuses. The measure leaves it to individual governments to determine what "particularly large" means in their economies.
While some European countries, including Britain, have already imposed limits on banker bonuses, the new rules set minimum caps for all 27 members of the EU. France and Germany have also effectively set caps by pressing banks to agree to limit executive pay.
A large part of the bonus must be deferred, thought it is up to governments to determine for how long. The money will be held as "contingent capital" for banks to call on first if they urgently need funding.
The measure also limits "exceptional pension payments" to avoid the kind of bloated severance packages for disgraced departing executives that have caused public uproar around Europe.
Banks will also be required to hold a minimum amount of capital to ensure they are covering risk from their trading book and complex securitized investments - such as mortgage-backed securities - to avoid a repeat of risk-related losses during the financial crisis. The capital requirements will take effect in 2012.
Global banking regulators are also separately drafting tighter capital requirements.
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