A different bonus cultureThis new EU wide law will transform the bonus culture and end incentives for excessive risk taking. These incentives for chasing short term bonuses over the long term health of the financial system played a key role in the crisis. The new rules mean reward is linked to long term performance. Upfront cash bonuses will be capped at 30% of the total bonus and to 20% for particularly large bonuses. In place of upfront cash between 40 and 60% of any bonus must be deferred and can be recovered if investments do not perform as expected. Moreover at least 50% of the total bonus would be paid as "contingent capital" (funds to be called upon first in case of bank difficulties).Bonuses will also have to be capped to salary. Each bank will have to establish limits on bonuses related to salaries, on the basis of EU wide guidelines, to help bring down the overall, disproportionate, role played by bonuses in the financial sector.Finally, bonus-like pensions will also be covered. Exceptional pension payments must be held back in instruments such as contingent capital that link their final value to the underlying strength of the bank. This will avoid situations, similar to those experienced recently, in which some bankers retired with substantial pensions unaffected by the crisis.
A different bonus culture
This new EU wide law will transform the bonus culture and end incentives for excessive risk taking. These incentives for chasing short term bonuses over the long term health of the financial system played a key role in the crisis. The new rules mean reward is linked to long term performance.
Upfront cash bonuses will be capped at 30% of the total bonus and to 20% for particularly large bonuses. In place of upfront cash between 40 and 60% of any bonus must be deferred and can be recovered if investments do not perform as expected. Moreover at least 50% of the total bonus would be paid as "contingent capital" (funds to be called upon first in case of bank difficulties).
Bonuses will also have to be capped to salary. Each bank will have to establish limits on bonuses related to salaries, on the basis of EU wide guidelines, to help bring down the overall, disproportionate, role played by bonuses in the financial sector.
Finally, bonus-like pensions will also be covered. Exceptional pension payments must be held back in instruments such as contingent capital that link their final value to the underlying strength of the bank. This will avoid situations, similar to those experienced recently, in which some bankers retired with substantial pensions unaffected by the crisis.
If anyone thinks this will end risk-taking I have a bridge selling for really cheap. In fact, it doesn't seem to me that this will be much of a restriction. It's not like firms were in the habit of giving out 100% of the bonuses in cash, or that they were not using deferred compensation already...
In fact, it doesn't seem to me that this will be much of a restriction. It's not like firms were in the habit of giving out 100% of the bonuses in cash, or that they were not using deferred compensation already...
Harsher treatment for bailed out banksTo address moral hazard the law will introduce special measures for bailed out banks and it will restrain the overall amounts paid in bonuses, encouraging bankers to prioritise a stronger capital base and lending to the real economy over their own pay and perks. The rules will also require that the repayment of taxpayers is the priority.Capital requirements for stable banksNew capital rules for re-securitisations and the trading book will ensure banks are properly covering the risks they are running on their trading activity, including for types of investments like mortgage backed securities that were central to the crisis.
To address moral hazard the law will introduce special measures for bailed out banks and it will restrain the overall amounts paid in bonuses, encouraging bankers to prioritise a stronger capital base and lending to the real economy over their own pay and perks. The rules will also require that the repayment of taxpayers is the priority.
Capital requirements for stable banks
New capital rules for re-securitisations and the trading book will ensure banks are properly covering the risks they are running on their trading activity, including for types of investments like mortgage backed securities that were central to the crisis.
The text agreed by Council and European Parliament negotiators on bank capital requirements and bonuses, which would subject them to the capital requirements directive, is set to be endorsed at Parliament's July plenary session. Below are some replies to the most frequently asked questions.
