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February 19, 2013 6:02 pm
When it comes to public meetings, the bonus cap is the bank reform that EU ministers dare not debate: the politics are too toxic. Yet behind the scenes, a furious diplomatic battle is afoot over a looming clampdown that could fundamentally alter how the financial sector operates in Europe.
Realising it was outnumbered and running short of time, Britain on Friday mounted a last ditch bid to avert a rigid 1:1 cap being imposed on bankers’ variable pay – a price doggedly demanded by the European Parliament.
The effort ran from George Osborne, the UK chancellor, down. Treasury officials called MEPs to explain the flaws in the reforms and the merits of British alternatives. Bank chief executives and board members pressured politicians in Berlin, Paris and Rome.
For all the calls and arm-twisting, however, a bonus cap remains all but certain. Revisions are under discussion, but nothing has emerged to ease the panic among banks.
“This is a disaster and will have consequences,” said one senior London banker.
This crackdown was never included in the Basel III international capital accords, an agreement the EU legislation is designed to implement. This dictates core prudential policy, ranging from capital levels to the easy-to-sell assets a bank must hold. But it is the bonus rules that represent the biggest sting for the industry – and biggest punch for politicians seeking to act on the sector’s excesses.
Over the past few days, Mr Osborne spearheaded efforts to head them off by making the case directly to his EU counterparts, some of whom were gathered in Moscow this weekend for a G20 meeting.
His aim was to convince Berlin and others to stand up to the parliament and stop a reform that was badly conceived and likely to backfire by raising fixed salaries. He also pressed Michael Noonan, the Irish finance minister spearheading the talks, to resist overruling the UK in order to pass the package.
There remains some caution over isolating Britain. Some finance ministers are still unsure whether they have the stomach for it – the UK has never been outvoted on a financial services reform.
But a strong majority of EU countries, including Germany, on Monday reiterated that while they might have sympathy for London’s arguments, ultimately they were willing to compromise with parliament if it was the price of passing the legislation.
Most countries have secured their top priorities in other parts of the legislation – concessions they are unwilling to risk in an ever more protracted fight with the European Parliament. Even Anders Borg, the Swedish finance minister who is one of Mr Osborne’s main supporters on remuneration, said national powers to raise capital levels on banks were for him “much more important” than the bonus debate.
“We have a strict regulation of bonuses here in Sweden. We would obviously be open to listening if there are particular ideas that are on the table in these issues in Brussels. But the red line for us is the capital requirements,” he told the FT.
At present the best that British diplomats can hope for are significant tweaks to how a bonus cap is enforced. A starting point for talks is a 1:1 ratio of variable to fixed pay, which can rise to 2:1 with a supermajority vote of shareholders.
Ireland is looking at various revisions, including exemptions for applying it to employees outside the EU, lowering the bar for shareholder approval required, and offering incentives to pay in debt that can be written down if a bank fails.
While the principle of a fixed cap will probably remain, it could also be raised to 3:1 – if the parliament were willing to compromise.
This would ease the blow for the industry, but only a little, given that some bankers are paid bonuses 10 or 20 times their salary. While it will not likely be the reform that forces banks to uproot from London, some senior staff will certainly be persuaded to move, with long-term implications for the City of London.
The importance of the reform is not lost on MEPs. One joked that while he saw banks’ technical staff to discuss implementing Basel, it was their chief executives who called about bonuses. “That shows their priorities,” he said.
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