EU lawmakers approve tough caps on bank bonuses

STRASBOURG, France (Reuters) - The European Parliament approved on Wednesday the world’s toughest curbs on bank bonuses as part of wider efforts to limit risk in a sector shored up by taxpayers.

Evening commuters are seen in central London March 18, 2009. REUTERS/Toby Melville

EU finance ministers are set to endorse the new law next Tuesday with the curbs taking effect from the start of next year so that only 30 percent of a bonus can be paid up front, with the rest deferred by up to five years.

The bloc’s financial services chief who drafted the law said the new rules sent a strong political message to banks.

“There will be no return to business as usual. The EU is leading the way in curbing unsound remuneration practices in banks,” EU Internal Market Commissioner, Michel Barnier said in a statement.

“Banks will need to change radically their practices and the mentality that has led in many cases to excessive risk-taking and contributed to the financial crisis,” he said.

The EU assembly voted by 625 in favour of the new law, with 28 against and 37 abstentions.

The new rules also force banks to set aside more capital against repackaged securities held on their trading books.

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The aim is to learn from the financial crisis when the value of securities linked to defaulting home loans crashed, forcing governments to step in with rescue packages.

“It’s good news. From January 1, the bonuses of bankers will be curbed,” French Green Party member Pascal Canfin told Reuters.

Austrian centre right lawmaker Othmar Karas said: “We want to make sure that bonus payments don’t support risk taking but dampen it.”

Arlene McCarthy, the British Labour MEP who steered the measure through parliament, said governments and taxpayers bailed out the banks with 3.9 trillion euros of support but banks have failed to take appropriate action.

“Despite the claims by banks that they have learned lessons, they have actually increased salaries and bonuses as a proportion of revenues,” McCarthy said.

Tougher trading book capital rules from the end of 2011 will also ensure the whole banking sector can withstand shocks better in future, Barnier said.

“The tougher capital requirements for banks’ trading books and their investments in securitisations -- the kind of highly complex products that have caused huge losses for banks -- will ensure that banks hold significantly more capital to cover their risks,” he said.

Writing by Huw Jones; editing by Mike Peacock