The European Parliament has voted to implement curbs on the bonuses banks are allowed to pay staff members to stop investment and banking institutions from rewarding excessive financial risk-taking.
Lawmakers slap curbs on opulent banking practices
The European Union is poised to become the first economic power in the world to take action against the bonuses paid to bankers and hedge fund managers after the European Parliament voted overwhelmingly in favor of a package to curb the payments.
The EU is also looking to move swiftly on the legislation with EU finance ministers scheduled to endorse the new rules when they meet next week. The curbs on excessive bonuses would then be phased in starting on January 1, 2011.
In the wake of the global financial crisis, critics of the bonus system have argued successfully that unregulated pay structures appeared to pressure bankers to take unnecessary risks in the pursuit of profits.
"Financial experts agree that a high-risk, short-term bonus culture, combined with a lack of capital, were at the heart of the global financial crisis in 2008," said the British Labour MP, Arlene McCarthy, during the parliamentary debate in Strasbourg on Wednesday.
Curbs go beyond G-20 proposals
The EU lawmakers agreed that no more than 30 percent of bonuses are to be paid in cash, falling to 20 percent in case of particularly large payments. In addition, a large part of payments - between 40 and 60 percent - must be deferred for three to five years and be recoverable, in case investments do not perform as expected.
Parliament also stressed that at least 50 percent of total bonuses must be handed out as so-called "contingent capital," meaning funds can be seized immediately if a bank runs into financial difficulty.
The curbs are more specific and tougher than the recommendations on limiting bank pay agreed on last year by G-20 countries.
The law gives national regulators in the 27-nation EU binding powers to take action against banks that fail to comply with the new rules.
The rules apply to foreign banks operating in the EU and to subsidiaries of EU banks operating abroad.
Author: Gregg Benzow (dpa/AP/AFP/Reuters)
Editor: Michael Lawton