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European Union Moves Toward Bonus Cap for Bankers European Union Moves Toward Bonus Cap for Bankers
(35 minutes later)
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.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 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.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 approved.The proposal would allow bonuses of as much as double the salary, if a sufficient number of a bank’s shareholders approved.
The agreement, which will also apply to the European units of foreign banks, 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 base for banks from around the globe.The agreement, which will also apply to the European units of foreign banks, 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 base for banks from around the globe.
‘‘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 during a visit to Riga, the capital of Latvia. ‘'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 during a visit to Riga, the capital of Latvia.
Mr. Cameron said Britain would ‘‘look carefully’’ at the final proposal before deciding how it would address the issue with other European governments. Mr. Cameron said Britain would ‘'look carefully'’ at the final proposal before deciding how it would address the issue with other European governments.
The bonus restrictions were added to legislation enacting the Basel III bank regulations, which were also approved by the Parliament. The Basel rules, approved by global central bankers and the financial authorities, were meant to ensure that lenders had the resources to weather crises. The bonus restrictions were part of legislation enacting the Basel III bank regulations, which were also given a provisional green light during the discussions early on Thursday. The Basel rules, approved by global central bankers and the financial authorities, were meant to ensure that lenders had the resources to weather crises.
‘‘We’ve achieved the most comprehensive banking reform in the European Union,’’ said Othmar Karas, an Austrian member of the European Parliament and chief negotiator of the deal. ‘'We’ve achieved the most comprehensive banking reform in the European Union,'’ said Othmar Karas, an Austrian member of the European Parliament and chief negotiator of the deal.
The parliamentary vote reflects in part the global backlash against the outsized remuneration in the financial sector that has surfaced since 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 that will decide whether shareholders gain more control over executive compensation.The parliamentary vote reflects in part the global backlash against the outsized remuneration in the financial sector that has surfaced since 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 that will decide whether shareholders gain more control over executive compensation.
The European Parliament’s 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.The European Parliament’s 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.
‘‘This legislation was resisted tooth and nail by the industry,’’ said Philippe Lamberts, a Belgian member of the Parliament’s Green bloc. ‘'This legislation was resisted tooth and nail by the industry,'’ said Philippe Lamberts, a Belgian member of the Parliament’s Green bloc.
While the battle has often been portrayed as matching Britain against the Continent, he said, the reality has been that ‘‘many in Paris, as well as Frankfurt and Berlin, were not too happy’’ about what was happening in Parliament, but were glad to let Britain take the heat for leading the opposition. While the battle has often been portrayed as matching Britain against the Continent, he said, the reality has been that ‘'many in Paris, as well as Frankfurt and Berlin, were not too happy'’ about what was happening in Parliament, but were glad to let Britain take the heat for leading the opposition.
The law is intended to reduce the financial incentives that led bankers to take risky bets, like those made on subprime housing debt in the United States during the credit bubble. But some critics of the legislation have warned that institutions might defeat the Parliament’s intent by simply raising bankers’ base pay. The law is intended to reduce the financial incentives that led bankers to take risky bets, like those made on subprime housing debt in the United States during the credit bubble. But some critics of the legislation have warned that institutions might defeat the intent of the rules by simply raising bankers’ base pay.
Mark Boleat, the policy chairman at the City of London Corporation, which is the voice of London’s financial center, said Thursday that ‘‘removing flexibility from pay arrangements in this highly cyclical industry would seem counterintuitive, especially if it leads to higher fixed salaries.’’ Mark Boleat, the policy chairman at the City of London Corporation, which is the voice of London’s financial center, said Thursday that ‘'removing flexibility from pay arrangements in this highly cyclical industry would seem counterintuitive, especially if it leads to higher fixed salaries.'’
Some bankers said the rule posed the question of why the bonus cap would not apply to other industries where staff stand to gain large bonuses. Stephen Hester, the chief executive of Royal Bank of Scotland, told BBC radio on Thursday morning that he did not think ‘‘bankers should be treated as special creatures in any way.’’ Some bankers said the rule posed the question of why the bonus cap would not apply to other industries where staff stand to gain large bonuses. Stephen Hester, the chief executive of Royal Bank of Scotland, told BBC radio on Thursday morning that he did not think ‘'bankers should be treated as special creatures in any way.'’
‘‘Perhaps one of the problems of the past was bankers got to a point where they thought they were special creatures,’’ Mr. Hester said. ‘‘So I think we should apply rules to anyone whatever these rules may be.’’ ‘'Perhaps one of the problems of the past was bankers got to a point where they thought they were special creatures,'’ Mr. Hester said. ‘'So I think we should apply rules to anyone whatever these rules may be.'’
Before the proposal can become law, a majority of E.U. states still must give their final approval, and there are expected to be more discussions of it by the European Parliament and among governments. One senior executive based at a major European bank in Hong Kong, who declined to be identified by name because he was not authorized to speak to the news media, said a move to higher base salaries might have unintended consequences for employees, as it ‘'would make us less flexible and in the event of a downturn we could end up having to put more people out into the street.'’
Before the proposal can become law, a majority of E.U. states still must give their final approval, and there are expected to be more discussions of important details by the European Parliament and among governments.
If the proposal goes through, the law on bonuses would take effect on Jan. 1, 2014.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 the signing bonuses known as golden handshakes, or with exit payments or contract buyouts. 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 the signing bonuses, exit payments or contract buyouts.
Michael Noonan, the finance minister of Ireland, which holds the rotating E.U. presidency, said Thursday that he would present the plan at a meeting of European finance ministers next week.Michael Noonan, the finance minister of Ireland, which holds the rotating E.U. presidency, said Thursday that he would present the plan at a meeting of European finance ministers next week.
As it stands now, the proposal would mandate a 1:1 maximum bonus-to-salary ratio as the standard remuneration limit. That could be raised to 2:1 if approved by 65 percent of shareholders representing at least half the shares, or 75 percent of votes if a quorum was lacking. As it stands now, the proposal would mandate a 1:1 maximum bonus-to-salary ratio as the standard remuneration limit. That could be raised to 2:1 if approved by two-thirds of shareholders representing at least half the shares, or 75 percent of votes if there are not shareholders representing half the shares represented, but those rules will be subject to further talks, according to E.U. officials.
If the bonus were to be raised above 1:1, one-quarter of the bonus would have to be deferred over five years, with the European Banking Authority setting a discount rate for that proportion.
Sharon Bowles, a Liberal Democratic legislator from Britain, said that extra margin would allow for slightly more than a two-fold bonus, but ‘‘you’re not suddenly going to have a hundredfold and have a massive bonus.’’
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 final rules would contain a review clause requiring the authorities to assess whether the rules were having damaging effects on the banking sector.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 final 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.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.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. ‘'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 British Conservatives in the European Parliament.
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.’’ 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.'’
David Jolly reported from Paris. Julia Werdigier contributed from London and Neil Gough from Hong Kong. David Jolly reported from Paris. Julia Werdigier contributed from London and Neil Gough from Hong Kong.
 

David Jolly contributed reporting from Paris.

David Jolly contributed reporting from Paris.