EU banker

BRUSSELS  – Members of the European Parliament on Wednesday approved new strict rules that will be limiting banker’s bonuses, the European Union (EU) said.

Upfront cash bonuses will be facing a cap and at least half of any bonus will have to be paid in contingent capital and shares. Reinforced rules were also approved on the capital reserves that banks must hold to guard against any risks from their trading activities and from their exposure to highly complex securities.

The EU informed that upfront cash bonuses will be capped at 30 percent of the total bonus and to 20 percent for particularly large bonuses, while 40 and 60 percent of any bonus must be deferred for at least three years and can be recovered if investments do not perform as expected. In addition, at least half of the total bonus would be paid as “contingent capital,” which are funds to be called upon first in case of bank difficulties, and shares.

Bonuses will also have to be capped as a proportion of salary, and bonus-like pensions will also be covered. Pension payments will have to be in accordance to the overall strength of the bank in order to avoid situations, similar to those experienced recently, in which some bankers retired with substantial pensions unaffected by the crisis their bank was facing.

Bankers will be encouraged to prioritize a stronger capital base and loans to the real economy rather than their own pay and perks with the new law, which prohibits bonuses to the directors of an institution unless this is appropriately justified.

Stricter capital rules on bank trading activities and higher standards for re-securitizations are additional issues that were covered in the new law, ensuring that banks properly cover the risks they are running on their trading activity, including for types of investments such as mortgage-backed securities that were central to the crisis.

The rules will be taking effect in January 2011 and those on capital requirements provisions no later than December, 31 2011, once Council finalizes the deal on possibly July 13.

“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. A high-risk and short-term bonus culture wrought havoc with the global economy and taxpayers paid the price. Since banks have failed to reform we are now doing the job for them”, said Member of the European Parliament Arlene McCarthy.