EU seeks fixed-salary cap for bankers' bonuses

Representatives from European Union states and the European Parliament are meeting to thrash out a deal on an EU law to implement a global bank capital accord known as Basel III, the world's regulatory response to the 2007-09 financial crisis.

Without the law, Basel III — which was due to be phased in from January — cannot be implemented.

The negotiations have dragged on because the European Parliament, in response to anger from investors and the public over the role played by banks in the financial crisis, also wants to peg bonuses to no more than annual fixed pay, a provision not in the Basel accord.

Member states had failed to agree on this until last Thursday when ambassadors from the 27 EU states gave Ireland, holder of the bloc's rotating presidency, a mandate to negotiate a cap after Britain failed to muster enough support to block one.

Pressure is building on Europe to finalize the rules after the United States said last week that its own version of Basel III would be ready in the spring.

Banks, many of which have had to be propped up with state aid, have not wanted to speak about bonuses at a time when people are tightening their belts amid government spending cuts.

Though social activists have been clamoring for a bonus cap, Isabel Pooley, a lawyer at CMS Cameron McKenna, said that it could backfire.

“The outcome is likely to be the opposite of what politicians desire: an increase in the fixed element of pay, which is not risk-adjusted, rarely falls when performance is poor and cannot be clawed back,” Pooley said.

Banks, some of which have already increased fixed salaries ahead of a possible cap, will be waiting to see in what circumstances the strict 1:1 bonus-to-salary ratio could be breached.

The European Parliament agrees that a 2:1 ratio could be allowed if backed by a majority of a bank's shareholders. Britain, however, has suggested that a simple majority of shareholders present at a bank's annual meeting could determine what ratio should be set.

Any deal on Tuesday would need endorsement from member states and full parliament.

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