EU caps bankers' bonuses to avoid risks
By Aoife White |
July 9, 2010, Friday
|
Print Edition
Print Edition
EUROPEAN Union law makers have voted overwhelmingly to cap bankers' short-term cash bonuses beginning next year, a move that European leaders hope other nations will adopt.
Members of the European Parliament voted 625-28 on Wednesday in favor of the new rules which will become final when they are approved by EU finance ministers, which is expected next week.
From 2011, bankers will only be able to get part of their yearly bonuses in cash upfront. The other 70 percent will be held back and paid out if the company performs well.
The caps come after a European outcry over payments to executives of banks that received huge state bailouts during the financial crisis. Some say bonuses encouraged bankers to take massive risks at the expense of the long-term future of their businesses.
Michel Barnier, the EU's financial services commissioner, said the new rules sent a strong message that "there will be no return to business as usual."
"Banks will need to change radically their practices and the mentality that have led in many cases to excessive risk-taking and contributed to the financial crisis," he said.
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. French and German governments have also effectively set caps by pressing banks to agree to limit executive pay.
On the other side of the Atlantic, the United States Federal Reserve warned last month that many American banks' compensation practices were deficient in curbing excessive risk-taking. The Fed can veto pay policies that cause too much risk-taking by staff.
In Europe, a large part of the bonus will have to be deferred, though it is up to governments to determine for how long. At least half of the total bonus will be held as "contingent capital" if banks urgently need funding. The measure also limits bloated severance packages for executives.
Members of the European Parliament voted 625-28 on Wednesday in favor of the new rules which will become final when they are approved by EU finance ministers, which is expected next week.
From 2011, bankers will only be able to get part of their yearly bonuses in cash upfront. The other 70 percent will be held back and paid out if the company performs well.
The caps come after a European outcry over payments to executives of banks that received huge state bailouts during the financial crisis. Some say bonuses encouraged bankers to take massive risks at the expense of the long-term future of their businesses.
Michel Barnier, the EU's financial services commissioner, said the new rules sent a strong message that "there will be no return to business as usual."
"Banks will need to change radically their practices and the mentality that have led in many cases to excessive risk-taking and contributed to the financial crisis," he said.
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. French and German governments have also effectively set caps by pressing banks to agree to limit executive pay.
On the other side of the Atlantic, the United States Federal Reserve warned last month that many American banks' compensation practices were deficient in curbing excessive risk-taking. The Fed can veto pay policies that cause too much risk-taking by staff.
In Europe, a large part of the bonus will have to be deferred, though it is up to governments to determine for how long. At least half of the total bonus will be held as "contingent capital" if banks urgently need funding. The measure also limits bloated severance packages for executives.
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