Starting in 2014, banks in the European Union must limit bonus payments for their employees. After some 10 months of tough negotiations, top European officials agreed late on Wednesday in Brussels to cap bonuses at a maximum of one year's base salary.
"For the first time in the history of EU financial market regulation, we will cap bankers' bonuses," said the European Parliament's head negotiator, Austria's Othmar Karas, in a statement. "The essence is that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business, namely financing the real economy, that of small and medium-sized enterprises and jobs."
The bonus cap was part of a package of financial laws hammered out between EU officials, the European Commission and representatives of the 27 member states in negotiations led by Ireland's Finance Minister Michael Noonan. The goal is to prevent bankers from taking excessive risks, which can shake the financial industry.
"This overhaul of EU banking rules will make sure that banks in the future have enough capital, both in terms of quality and quantity, to withstand shocks," Noonan said. "This will ensure that taxpayers across Europe are protected into the future."
Fierce Resistance from London
European Parliament and member states must still formally approve the compromise, which would allow banks to grant bonuses of twice employees' fixed salary only if the majority of their shareholders approved. The legislation is part of the far-reaching "Basel III" financial reform package aimed at increasing capital requirements to shore up the banking industry.
Wednesday's agreement to implement what will be the world's strictest pay cap was hard-won after months of resistance from member states. Chief among them was Great Britain, which boasts Europe's largest financial sector. London argued that the bonus cap would hobble industry growth, but failed to attract backing from other countries to prevent the measure.
The new rules will apply to all EU financial institutions and their foreign subsidiaries. It will also apply to the subsidiaries of American or Asian bank with branches in the EU.
Top bankers can currently earn performance-based bonuses of up to several times their salary. But this practice has angered the public, particularly after banks doling out such bonuses accepted government bailouts in the financial crisis. It remains to be seen just how banks will react to the new legislation, but some experts predict that they will simply circumvent it by creating more complicated pay structures.