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European Union Moves Toward Bonus Cap for Bankers European Union Moves Toward Bonus Cap for Bankers
(about 2 hours later)
BRUSSELS — The European Union moved a step closer early on Thursday to imposing strict curbs on bonus pay for bankers, which has been blamed by many politicians for inciting the risk-taking behavior that triggered the recent financial crisis. BRUSSELS —   The European Union moved a step closer Thursday to imposing strict curbs on bonus pay for bankers, which has been blamed by many politicians for inciting the risk-taking behavior that set off the 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 starting next year.  
The agreement, as it stands, was seen as some as a blow to Britain, which partly relies on generous remuneration packages to ensure that the City of London remains the biggest financial center in Europe and the overseas headquarters of banks from around the globe. A provisional agreement struck by the European Parliament, the European Commission and national representatives could mean that the coveted bonuses many bankers receive will be capped at the level of their annual salaries, starting next year. The proposal would allow bonuses of as much as double the salary if a sufficient number of a bank’s shareholders agreed.
’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 U.K.,” David Cameron, the British prime minister, said on a visit to Riga, the capital of Latvia. A majority of E.U. 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,” Michael Noonan, the finance minister of Ireland, which holds the rotating E.U. presidency, said in a statement after the talked ended.  
Under the proposal, the bonus rules would also apply to bankers employed by E.U. banks but working outside the bloc, for example in New York. E.U. authorities are drafting separate rules that could restrict remuneration at private equity firms and hedge funds. The agreement, as it stands, is a blow to Britain, which partly relies on generous remuneration packages to ensure that the City of London remains the biggest financial center in Europe and the overseas home of banks from around the globe.
Mr. Noonan said he would present the plan at a meeting of finance ministers next week.  
Alex Beidas, a lawyer with Linklaters, a 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 U.S. and Asia.”  ‘‘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 U.K.,’’  David Cameron, the British prime minister, said in Riga, the Latvian capital.
The rules were “also likely to lead to an increase in salaries which is undesirable as banks are trying to minimize their fixed costs,” she said.  
Amid concerns that capping bonuses could mean bankers begin to migrate to banks in more economically dynamic locations, lawmakers emphasized that the proposal would include provisions for monitoring such side effects and, if necessary, allow leeway for remedies.    
“If the bonus cap is shown to cause bankers to begin relocating outside the E.U., 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. The bonus restrictions were added to legislation enacting the Basel III bank regulations. The Basel rules, which were agreed to by global central bankers and the financial authorities, are meant to ensure that  lenders have the resources to weather crises.
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 groundbreaking measure that in my view will make the economic system fairer and safer," Mr. Schulz said in a statement. "Exuberant bonuses often provided a wrong incentive for financial markets, encouraging risky behavior and short-term, purely speculative investment," he said. ‘‘We’ve achieved the most comprehensive banking reform in the European Union,’’ Othmar Karas, an Austrian member of the European Parliament and chief negotiator of the deal, said at a news conference.
An E.U. diplomat stressed that a significant amount of technical work still needed to be done before the rules were finalized by governments.  
The diplomat, who spoke on customary condition of anonymity, said the rules would contain a review clause requiring authorities to assess whether the rules were having damaging effects on the banking sector. The envoy said no date was fixed for the review but that could be finalized during discussions over coming weeks. The parliamentary vote reflects a global backlash against the outsized pay in the financial sector after the financial crisis and economic dislocation that followed. Voters in Switzerland, which is  not an E.U. member, will go to the polls this weekend for a referendum question that will decide whether shareholders gain more control over executive compensation.
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 E.U. officials also approved early Thursday. ‘‘This legislation was resisted tooth and nail by the industry,’’ said Philippe Lamberts, a member of the Parliament’s Green bloc from Belgium.
Mr. 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.” While the battle has often been portrayed as matching Britain against the Continent, the reality has been  that   ‘‘many in Paris, as well as Frankfurt and Berlin, were not too happy’’ about  what  was happening in Parliament,  he said,  but did not mind allowing London to take the leading role in opposing it.
 
 
 
 
A majority of E.U. states still must give their final approval for the legislation to take effect, and there are expected to be more discussions on the rules at the European Parliament and among governments. 
 
If the proposal goes through, the law on bonuses would take effect on Jan. 1, 2014.
 
Mr. Karas acknowledged that more work lay ahead, with a need for technical working groups to ‘‘put it into a text’’ that  ‘‘holds water legally.’’ Legislators said they would work to ensure that bankers did not get around the rules with so-called ‘‘golden handshakes’’ and ‘‘contract buyouts.’’
 
 
 
 
The goal of the proposed bonus cap is to balance many different interests, including ‘‘the desire to limit bankers’ pay while maintaining a competitive European banking sector,’’ Michael Noonan, the finance minister of Ireland, which holds the rotating E.U. presidency, said in a statement after the talks ended. Mr. Noonan said he would present the plan at a meeting of finance ministers next week.
 
Under the proposal, the bonus rules would also apply to bankers employed by E.U. banks but working outside the bloc,  in New York, for example. The E.U. authorities are drafting separate rules that could restrict remuneration at private equity firms and hedge funds.
 
An E.U. diplomat stressed that a significant amount of technical work needed to be done before the rules were  made final by governments. The diplomat, who spoke on the customary condition of anonymity, said the rules would contain a review clause requiring the authorities to assess whether the rules were having damaging effects on the banking sector.
 
 
 The diplomat said no date had been  fixed for the review, but said that could be done  during discussions over coming weeks.
 
To address concerns that putting a cap on bonuses could mean that  bankers would migrate elsewhere, lawmakers emphasized that the proposal would monitor any such side effects and, if necessary, allow scope for remedies.
 
‘‘If the bonus cap is shown to cause bankers to begin relocating outside the E.U., 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.
 
Alex Beidas, a lawyer based in London with the law firm Linklaters, warned that the legislation signified ‘‘a major disadvantage in the global market’’ for banks, and she said there was ‘‘a real danger that this will result in bankers moving to the U.S. and Asia.’’
 
The rules were ‘‘also likely to lead to an increase in salaries, which is undesirable as banks are trying to minimize their fixed costs,’’ Ms. Beidas said.
 
The bonus limit is part of a set of measures requiring higher capital requirements for banks, called the Basel III rules, which the E.U. officials also approved Thursday. Mr. 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 would ‘‘ensure that taxpayers across Europe are protected into the future.’’
 
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 groundbreaking measure that in my view will make the economic system fairer and safer,’’ Mr. Schulz said in a statement. ‘‘Exuberant bonuses often provided a wrong incentive for financial markets, encouraging risky behavior and short-term, purely speculative investment.’’
 
David Jolly reported from Paris.
 

David Jolly contributed reporting from Paris.

David Jolly contributed reporting from Paris.