EU decides firm cap on banker bonuses

[February 28, 2013]  BRUSSELS (AP) -- Top European Union officials late Wednesday struck an agreement on a package of financial laws that includes capping bankers' bonus payments at a maximum of one year's base salary.

The bonuses will only be allowed to reach twice the annual fixed salary if a large majority of a bank's shareholders agrees, said Othmar Karas, the European Parliament's chief negotiator.

"This overhaul of EU banking rules will make sure that banks in the future have enough capital, both in terms of quality and quantity, to withstand shocks. This will ensure that taxpayers across Europe are protected into the future," said Ireland's Finance Minister Michael Noonan, who led the negotiations for 27 governments.

The bonus cap legislation was part of a sweeping financial reform package introducing higher capital requirements for banks, the so-called Basel III rules.

Wednesday's agreement -- reached at during an eight-hour make-or-break negotiating session between EU lawmakers, the EU Commission and representatives of the bloc's 27 governments in Brussels -- ensures the package can take effect next year.

Top bankers and traders may currently earn bonuses multiple times their base salary based on their performance, given that there is no legal pay limit yet. But public outrage has grown across Europe over large bonus payments to executives of banks that received huge state bailouts during the financial crisis.

Proponents of the bonus cap say the payments encouraged bankers to take massive risks at the expense of the long-term future of their businesses, which helped to destabilize the financial system.

"For the first time in the history of EU financial market regulation, we will cap bankers' bonuses," Karas said in a statement. "The essence is that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business, namely financing the real economy, that of small and medium-sized enterprises and jobs."

Britain, home to Europe's biggest financial industry, had vehemently rejected the proposal, saying the rules will drive away talent and hamper growth. London tried to rally other EU governments behind its position, but failed to garner enough support. Most governments said they'll accept the bonus cap to ensure the more important Basel III rules come into force by January 2014.

The negotiations on the package have been dragging on for 10 months. After a meeting last week broke down without a compromise, the European Parliament -- which has insisted on adding the banker bonus legislation to the wider Basel III package -- gave the EU governments an ultimatum until Wednesday's negotiating session.

Now the final approval by parliament and government leaders of the package is expected to be a formality, although it was not immediately clear what position Britain would take. But even if London would not back the package, the remaining EU members could still force the legislation through by adopting it by qualified majority.

The key part of the package is requiring all banks to gradually increase their capital over the coming years to stabilize the financial sector across the European Union's member states, which together form the world's largest economy.

The legislation is part of global efforts to prevent another shock to the financial system like that prompted by Lehman Brothers' 2008 collapse, when banks were highly leveraged while enjoying low capital requirements. The lack of solid financial cushions meant that many banks were vulnerable, and eventually required taxpayer-funded bailouts to avoid bankruptcy.

[Associated Press; By JUERGEN BAETZ]

Juergen Baetz can be reached on Twitter at http://twitter.com/jbaetz.

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