EU agrees cap on bankers' bonuses

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28 February 2013

European Union chiefs have agreed a package of financial laws that includes capping bankers' bonuses at a maximum of one year's basic 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 was part of a sweeping financial reform package introducing higher capital requirements for banks, the so-called Basel III rules.

The agreement - reached during an eight-hour make-or-break negotiating session between EU politicians, the European 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 destabilise the financial system.

"For the first time in the history of EU financial market regulation, we will cap bankers' bonuses," Mr Karas said. "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 would drive away talent and hamper growth.

British officials had tried to rally other EU governments behind its position, but failed to garner enough support. Most governments said they would accept the bonus cap to ensure the more important Basel III rules come into force by January 2014.

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