April 25, 2012

E.U. Could Trim Bank Bonuses

Sees banks as utilities, could incorporate restrictions into Basel draft

Banks in the European Union could soon find themselves regarded in much the same way as power or water companies: entities that keep society functioning but pretty much stay in the background. That is, if lawmakers have their way about new proposed amendments to the draft law prepared by the Basel Committee on Banking Supervision. At stake are not only bankers’ bonuses, but their entire culture.

Bloomberg reported Wednesday that among the amendments proposed are rules that would forbid bonuses that exceed the salary a banker draws. That rule is actually tougher than the one originally proposed by its originator, Othmar Karas, an Austrian Christian Democrat lawmaker who is leading work on the draft rules in the European Parliament.

Karas had originally proposed capping bonuses at double a banker’s fixed pay, but the tougher measure, according to Philippe Lamberts, a Belgian who’s representing Parliament’s Green group in the negotiations, has cross-party support.

A vote on that measure, and numerous others, is scheduled for May 8. The Basel bank capital rules will become law in all 27 E.U. nations on Jan. 1.

According to Michel Barnier, the financial services commissioner of the E.U., some banker pay is beyond “all reason, common sense and morality.” While Barnier, who is responsible for draft legislation, has said he will consider additional rules governing bonuses, Parliament may not wait for him, insisting that the restrictions belong instead in the Basel law. The basic purpose of that law, lawmakers point out, is to shut down excessive risk taking and push banks into more responsible foundations for the economy.

While banks have protested such measures, saying that they will drive away talent and possibly harm a stable financial system, lawmakers do not agree. According to Sharon Bowles, who chairs the E.U. Parliament’s economic and monetary affairs committee, “a majority” of members “have had enough of banks living on a different planet than everyone else.” She was quoted saying, “I think it’s more than that though—we want to change banks’ behavior.”

Simon Gleeson, a financial services lawyer at Clifford Chance LLP in London, called such a bonus-limiting move “the ‘Banker Enrichment Act,’” saying in the report, “You’re telling them 50% of your next bonus is guaranteed, not just next year but for the whole career, and you’ll receive it in cash. I’d be surprised if bankers weren’t lobbying for it,” Bowles disagreed.

While bonus limits could cause “some salary inflation,” Bowles said, she added, “I don’t think it will totally compensate for the reduced bonus payments.” She also pointed out another factor. “It will make banks face up to what they are paying and ask whether they want to do this on a permanent basis,” she said in the report. “Shareholders and investors will ask questions about whether it’s right.”

Lamberts said that once the law is on the books, he wants to find a way to return to the time when banks served the economy, instead of the other way around. While he acknowledged that banking is a “very important industry,” he added, “It’s just that it’s not more important that other utilities like energy and water.”

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