* Stormy late-night talks seal globe's first cap on bank
* Tide turned against Britain after it lost German backing
* Lawmaker Karas says bonus victory could snowball, catching
By John O'Donnell
BRUSSELS, March 4 Some of the lawmakers who
achieved a European Union cap on bank bonuses wanted to
celebrate the deal with champagne, such was the symbolism of
tackling what they see as a root cause of the financial crisis.
In the end there was no toast to mark the agreement in the
early hours of Feb 28, partly out of sensitivity towards London
which sees in the new measures a threat to its place as a global
Although the idea of a fixed ratio of bonus to salary was
not new, the drive to make it happen was motivated by "a lot of
anger" that an earlier rule introduced by the European
Parliament to defer bonuses had not halted rising payouts, said
Sharon Bowles, who as chair of the parliament's economic and
monetary affairs committee was central to negotiations.
The concept had first been put forward by European
Commissioner for Internal Markets and Services Michel Barnier at
the beginning of 2012.
Even supporters of the deal had not predicted that the
European Parliament would succeed in setting the basic cap at
the same level as the base salary paid to bankers.
With Europe still struggling to overcome a financial crisis
that began more than five years ago and banks still needing
state support, there is little sympathy among European lawmakers
for those who say that the new rules will drive the best bankers
and traders to work for U.S. or Asian banks outside the EU.
"With the rules on banker bonuses, we will change the
culture in management boards and on the trading floor, putting
an end to short-sightedness for the mere sake of high pay," said
Udo Bullmann, a German member of the European Parliament who
fought for stricter rules at last week's meeting.
Britain's defeat on a financial reform breaks with an
unwritten rule in Brussels, namely that EU legislation on
financial services requires London's blessing because of the
importance of banking to the British economy. The UK is home to
some of the top earners in finance, and the industry accounts
for about one tenth of the country's economy.
The perceived threat to London has prompted senior figures
in some of the biggest banks to engage directly with European
lawmakers in an attempt to head off a curb on bonuses.
But the strong political undercurrent will make it hard for
Britain's Finance Minister George Osborne to unpick the
agreement, which is due to take effect next year, when he meets
with his European counterparts in Brussels on Tuesday.
Osborne cannot block the deal from becoming European law as
Britain's blessing is not required. But he is likely, at the
very least, to underline his reservations and could argue for
While he cannot count on the support of any other EU country
to change bonus rules, if other parts of the wider bank capital
agreement are challenged, Osborne could pounce on this
opportunity to push for a softening of pay curbs.
One source familiar with Britain's position privately
questioned the legality of the EU pay curbs, hinting at possible
grounds for a legal challenge. But it is unclear whether Britain
would favour such a confrontation.
"I don't believe that the majority of finance ministers will
want to wage that battle so publicly because there are more
punches to receive than to give in that battle," said Philippe
Lamberts, a Green MEP who was one of those behind the push for
the bonus cap.
The new rules, finalised at a chaotic and at times heated
meeting of roughly 50 lawmakers and officials, will not apply to
the majority of bank staff, who on average earn bonuses of up to
30 percent of salary.
It will instead target senior management and so-called "risk
takers", such as traders, whose bonuses are many times their
Analysts estimate the law will affect around 300 to 500
people in each large bank or around 5,000 people in London, but
that could rise significantly if regulators widen the definition
of "risk takers".
European Parliament lawmakers demanded the cap in return for
their approval for wider rules on bank capital, a key building
block for a system of European Central Bank-led bank supervision
due to start next year.
The determination of the parliament to introduce a bonus cap
took many countries, including Britain, by surprise.
At last week's gathering, the exchanges became so heated
that the talks came close collapse, with one lawmaker repeatedly
threatening to leave the room, people who attended the talks
said. The differences centred not only on the bonus limits but
also on parliament's demand for greater reporting transparency
There were concessions, with weary lawmakers eventually
agreeing to discount non-cash bonuses paid after five years,
raising the effective ceiling on total bonus beyond
two-times-salary. Bullmann, a German Social Democrat, fought to
reduce the amount of bonus that can be discounted in this way
during what participants said were at times stormy exchanges.
But as the clock moved closer to midnight and the
parliament's translators prepared to finish their working shift,
lawmakers rushed through a final draft of the legislation.
In the build up to last week's negotiations, Britain had
become increasingly isolated in its efforts to fend off
restrictions on bonuses, Bowles said.
Although initially supported by Germany, officials in Berlin
had become uneasy about the alliance with London because of the
potential damage it could do to German Chancellor Angela Merkel,
who faces national elections later this year.
"Maybe they thought that together (with Germany) that would
be definitive," Bowles one of the parliament's most influential
members, said. "As we got closer to German elections ... the
whole dynamic changed."
Behind the scenes, others were also making clear the threat
they thought a cap could pose not just to London but to
Germany's financial centre Frankfurt.
Early last year, Anshu Jain, the co-chief executive of
Germany's Deutsche Bank phoned Bowles to spell out his concerns.
Others including Standard Chartered chief executive
Peter Sands and HSBC chairman Douglas Flint were also
involved in the debate about pay and wider bank capital rules.
But the banks had little success in winning broad political
support and no country, bar Britain, was willing to speak out
against the European parliament's proposals.
Deutsche Bank, Standard Chartered and HSBC declined to
The lack of opposition from countries to the European
Parliament's radical reform took many there by surprise. And
although many country officials privately had reservations about
the law, said Bowles, they remained largely silent.
Britain's isolation may set a precedent.
"In the past, we didn't think Europe had anything to teach
us," said one former British government official. "But British
influence has diminished. If they don't have the Germans behind
them, Britain is toast on a lot of these issues."
The parliament's focus is now set to turn to hedge funds and
private equity firms, most of whom have chosen London as their
base in Europe, Bullmann said.
They are not affected by the new rules on pay. But they
could be subject to curbs under future legislation.
Othmar Karas, the Austrian lawmaker who negotiated the bank
pay curbs said he hoped the rules on bonus would prompt similar
reform in other areas of finance.
"It will have a snowball effect," he said.