Brussels, 07/07/2010 (Agence Europe) - In its adoption, by 625 votes in favour, 28 against and 37 abstentions, of the report by Arlene McCarthy (S&D, UK) on capital requirements for the trading book and for re-securitisations and the supervisory review of remuneration policies (amending Directives 2006/48/EC and 2006/49/EC), the European Parliament approved, in Strasbourg on Wednesday 7 July, the “Basel III” directive, which provides for caps on bonuses for the first time (EUROPE10171). This directive established a link between the distribution of a bonus and the medium-term performance of the banking establishment. The Council has still to adopt the text formally, probably on 13 July, and the new legislation will enter into force early in 2011.
Sharon Bowles (ALDE, UK), the president of the parliamentary committee on economic and monetary affairs, described the new European legislation aiming to limit traders' bonuses as a “historical success”. “The tough new rules voted in by the Parliament today will be implemented in time for this year's bonus payout. It will stop high-earning bankers taking home huge pay cheques regardless of their performance or profitability of their institution”.
A new bonus culture. The new legislation gets rid of incentives to create a “casino economy” which fuelled the recent crisis, by setting cash limits of 30% of pay (20% when the sums are particularly high) and to around 50% in the case of a premium paid in the form of contingent capital instruments (shares). Between 40% and 60% of the bonus would have to be delayed and would not be paid if the investments made did not lead to the anticipated results. Additions, bonuses disguised as pension benefits will also be stored as contingent capital for a minimum of 5 years in case the bank performs poorly or collapses in the meantime.
Stricter treatment for banks that get bailed out. In addition, strict limits have been imposed for the premiums paid to banks bailed out by the state. The banks will be encouraged to give priority to shoring up their financial standing and to loans to the real economy over their own salaries and profits. The new rules stipulate that no variable remuneration can be paid to the directors of these banks unless due reasons are given.
Own-capital requirements for the financial stability of the banks. The compromise provides stricter rules on own capital for the trading activities of the banks and tougher standards for re-securitisation. The new requirements will guarantee that the banks sufficiently cover the risks they take as part of their trading activities, including for investments such as mortgage-backed securities, which played a large part in the crisis. Studies carried out show that in comparison to the current situation, the new rules should mean that the banks have three to four times the own capital to cover the risks brought about by their trading.
Quoted companies and “golden parachutes”. The EP also adopted (594 votes in favour, 24 against and 35 abstentions) a report by Saïd El Khadraoui (S&D, Belgium) on the remuneration regime for the directors of companies quoted on the stock exchange. The EP stresses the need to extend the principles of the new salary policy to companies quoted on the stock exchange. It proposes that companies quoted on the stock exchange be obliged to provide the details of their salary policies if it appears that their directors' pay does not observe the principles aiming to put an end to incentives to excessive risk-taking and to making decisions on the basis of short-term prospects. This resolution also proposes to give the share-holders tighter control of the members of the boards of quoted companies.
Lastly, the EP suggests a limit of the equivalent of two years of the fixed component of the salary of a board member for the total amount of compensation paid at the end of a contract (“golden parachutes”) in the event of leaving before the end, and banning the payment of any compensation in the event of negative performances or voluntary departure.
EU a “pioneer in cleaning up pay in banks”. The new requirements on pay and bonuses send out a strong political message: “There will be no return to business as usual. The EU is leading the way in curbing unsound remuneration practices in banks”, commented the European Commissioner Michel Barnier. “When they engage in riskier activities, the banks need more own capital. The directive thus provides greater own-capital requirements for banks' trading books and their investments in securitisations - the kind of highly complex products that have caused huge losses for banks. This will make the sector as a whole better able to resist stress”, he added. (L.C./transl.fl)