The negotiations on restricting bankers’ bonuses - a measure proposed by the European Parliament - look set to be particularly arduous. MEPs are unlikely to accept a compromise proposed by the Danish Presidency during three-way talks on the reform of the Capital Requirements Directive, known as CRD IV ⁽¹⁾, which took place on 13-14 June in Strasbourg.

The proposal, which Europoliticshas seen, will not have been fully discussed by the Council at the time of this edition going to press. However, Europoliticscan reveal that it provides for the application of ratios between the bonuses and fixed salaries of bankers, and these would be more restrictive for financial institutions receiving public aid. For all other institutions, ratios would be less restrictive (in other words, higher) and shareholders would be authorised to change them.

Meanwhile, Parliament has proposed that bonuses should not exceed the fixed remuneration of bankers (a one-one ratio) and that this rule should apply to all financial institutions.

The Danish proposal suggests distinguishing financial institutions receiving public aid from other institutions, which means, more specifically, institutions that receive: 1. a government intervention, for example in the form of a recapitalisation scheme pursuant to state aid rules or subject to government-backed guarantees; or 2. use of ESCB (European System of Central Banks) longer-term refinancing operations after 1 January 2013.

Concerning this type of financial institution, the compromise proposal suggests:

- for board members, bonuses may not exceed the amount of fixed remuneration (one-one ratio)

- for other ‘risk-takers’, bonuses may not exceed three times the amount of fixed remuneration (three-one ratio).

SHAREHOLDER CONTROL

Concerning all other institutions, the Presidency has proposed:

- for board members, bonuses may not exceed three times the amount of fixed remuneration (three-one ratio)

- for other risk-takers, bonuses may not exceed five times the amount of fixed remuneration (five-one ratio).

Above all, the general assemblies of these institutions, meaning the shareholders, will be authorised to adopt higher ratios than those proposed in the legislation. This means they would be able to control these ratios and apply less restrictive limits to bonuses.

Parliament does not find this compromise acceptable, and MEPs will not back down easily on this important question. Europoliticshas been told they will form a “very strong coalition” and that the situation that arose during negotiations on CRD III, whereby the Council refused to introduce truly binding measures, “cannot happen again”.

For now, it is difficult to establish the Council’s position, but it seems that a certain number of member states are not opposed on principle to the limitation of bonuses, and that there may not even be a blocking minority. Questions arose over the definition of methods of application.

As for the Commission, it is in favour of more restrictive rules.

More widely, limiting bonuses gives rise to particularly conflicting dossiers - with systemic buffers being one of the most sensitive questions - on which Council and Parliament now need to agree. A balance must therefore be found between all these questions, and in this respect the road ahead remains long. The next round of three-way talks will take place within ten days. n

MEPs will not back down and will form ‘a very strong coalition’ against the Danish compromise proposal
⁽¹⁾ The Commission proposed a regulation and a directive in July 2011, which aims to implement the Basel III agreements