May 15, 2012 / 3:50 PM / 5 years ago

Banking lobby warns of risks from capping bonuses

LONDON, May 15 (Reuters) - A cap on bank bonuses in the European Union would be intrusive and encourage banks to bump up basic pay instead, leading bank lobby officials said on Tuesday.

Bankers often receive a bonus of several times their basic annual salary but the European Parliament's economic affairs committee agreed on Monday that bonuses should not be higher than a banker's fixed pay.

The EU Parliament's action follows public outrage at high pay packages in the financial services industry when many banks are still supported by taxpayer money and when there are deep cuts in government spending and rising unemployment.

But bank lobby groups urged caution in legislating over bankers' bonuses.

"We believe that attempts by legislators to set a maximum ratio between fixed and variable remuneration intrudes on the important role of shareholders to determine key questions on pay and commercial strategy," said Simon Lewis, chief executive of the Association for Financial Markets in Europe (AFME), a banking lobby.

A cap could make lenders more fragile by increasing fixed costs, Lewis said.

Pressure from shareholders has already forced banks such as Barclays and HSBC to rein in cash elements of bonuses.

In the UK, the total bank bonus pot is forecast to nearly halve this year due to the euro zone crisis and investor anger over poor share price performance.

Mark Boleat, policy chairman at the City of London Corporation, home to about half the capital's financial services industry, said companies must be free to reward success.

"This measure will lead to increased salary packages and in turn a higher fixed cost base, thereby putting Europe at an economic disadvantage given the cyclical nature of the industry," Boleat said.

He said it was up to shareholders to curb bonuses and they had already taken action.

The European Union introduced certain curbs on banker bonuses in January last year to try to reduce excessive payouts after the financial crisis. These regulations are already some of the toughest in the world and the EU Parliament's bonus cap would make them even tougher.

Since then banks in Europe have tended to compensate for restrictions on bonuses by raising bankers' basic salary packages so that bankers' pay has stayed high.

The EU Parliament's bonus cap was included in a draft EU law that will force banks to hold more capital to protect them against shocks.

EU states also reached a deal on Tuesday in Brussels on their own version of the draft bank capital law which does not include the bonus cap.

Later this month the parliament and EU states will sit down to try to agree a final text for the legislation, which should come into force next January. But it is unclear whether EU countries will back the bonus cap.

Germany's Finance Minister Wolfgang Schaeuble signalled to reporters in Brussels on Tuesday that while he found the idea of pay curbs interesting, it might be difficult to introduce them in a law about bank capital.

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