Europe close to curbing bank bonuses

London is worried that the best bankers might flee in favour of US or Asian cities, writes James Kanter.

THE European Union moved a step closer this week to imposing strict curbs on bonus pay for bankers, which has been blamed by many politicians for inciting the risk-taking behaviour that triggered the global financial crisis.

A provisional agreement struck between the European Parliament, the European Commission and national representatives could mean that the coveted bonuses many bankers receive are capped at the level of their annual salaries.

The agreement, as it stands, was seen by some as a blow to Britain, which partly relies on generous remuneration packages to ensure that the City of London remains the biggest financial centre in Europe and the overseas headquarters of banks from around the globe.

"We need to make sure that regulation put in place in Brussels is flexible enough to allow those banks to continue competing and succeeding while being located in the UK," British Prime Minister David Cameron said on a visit to Riga, the capital of Latvia.

Most EU states still must give their final approval for the legislation to go into force and there are expected to be more discussions on the rules at the European Parliament and among governments.

The goal of the bonus cap proposal is to balance many different interests, including "the desire to limit bankers' pay while maintaining a competitive European banking sector", said Ireland's Finance Minister, Michael Noonan. Ireland holds the rotating EU presidency.

Under the proposal, the bonus rules would also apply to bankers employed by EU banks but working outside the bloc, for example in New York. EU authorities are drafting separate rules that could restrict remuneration at private equity firms and hedge funds.

Noonan said he would present the plan at a meeting of finance ministers next week.

Alex Beidas, a lawyer with Linklaters, the global legal and consulting firm based in London, warned that the legislation represented "a major disadvantage in the global market" for banks and said there was "a real danger that this will result in bankers moving to the US and Asia".

The rules were "also likely to lead to an increase in salaries which is undesirable as banks are trying to minimise their fixed costs", she said.

Amid concerns that capping bonuses could mean that bankers begin to migrate to banks in more economically dynamic locations, lawmakers emphasised that the proposal would include provisions for monitoring such side-effects.

"If the bonus cap is shown to cause bankers to begin relocating outside the EU, then we will have the ability to swiftly look again at the provisions in place through an early review," said Vicky Ford, a member of the European Conservatives and Reformists group from Britain.

Political leaders who hailed the preliminary deal included Martin Schulz, the president of the European Parliament and a German member of the Alliance of Socialists and Democrats.

"The cap on bonuses is a ground-breaking measure that in my view will make the economic system fairer and safer," he said. "Exuberant bonuses often provided a wrong incentive for financial markets, encouraging risky behaviour and short-term, purely speculative investment."

An EU diplomat stressed that a significant amount of technical work still needed to be done before the rules were finalised by governments.

The diplomat said the rules would contain a review clause requiring authorities to assess whether the rules were having damaging effects on the banking sector.

The proposal would also allow higher bonuses if a sufficient number of shareholders agreed.

It is part of a set of laws requiring higher capital requirements for banks, called the Basel III rules, which the EU officials also approved on Thursday.

Noonan said the Basel III package would "make sure that banks in the future have enough capital, both in terms of quality and quantity, to withstand shocks" and that "will ensure that taxpayers across Europe are protected into the future".