MEPs approved to cap banker's bonuses to curb speculative risk-taking

The European Parliament adopted in plenary session a banking reform package that should spur growth, by making it easier for banks to lend to small firms that drive the real economy. This reform includes measures such as capping banker's bonuses to curb speculative risk-taking, stepping up capital provisions to help banks cope better with crises, and stiffen supervision.

MEPs approved a banking reform legislation package that aims to strengthen EU banks. The legislation will cap banker's bonuses to curb speculative risk-taking, step up capital provisions to help banks cope better with crises and stiffen supervision. In February 2013, the European Parliament and the Council reached a political agreement on capital requirements for banks.

With the new legislation, the basic salary-to-bonus ratio will be 1:1 in order to curb speculative risk-taking. This could be raised to a maximum of 1:2, if approved by at least 66% of shareholders owning half the shares represented, or of 75% of votes if there is no quorum. To encourage bankers to take a long-term view, a minimum of 25% of any bonus exceeding 100% of salary, must be deferred for at least five years. EU banks will be also required to set aside more and better capital as a cushion against hard times, i.e. a minimum of 8% good-quality capital, of which just over half must be Tier 1, the highest-quality, lowest-risk form (a doubling of today's Tier 1 requirement).

The new rules will reduce the nominal risk that they must assign to some loans, to encourage banks to lend to small and medium-sized enterprises (SMEs). This in turn will reduce the amount of capital that they must set aside to cover loans that could turn bad, thus making more available for lending. The legislation will require banks to disclose profits made, taxes paid and subsidies received country by country, as well as turnover and number of employees. From 2014, these figures should be reported to the European Commission and from 2015 made fully public. Banks will be supervised by EU member states' competent authorities, in collaboration with the European Banking Authority (EBA), whose supervisory powers will be expanded.