Library of Congress

Law Library of Congress

The Library of Congress > Law Library > News & Events > Global Legal Monitor

European Union: Draft Rules on Bankers’ Bonuses and Bank Capital Requirements

(Mar. 20, 2013) On February 28, 2013, the European Parliament and representatives of the Council of the European Union reached a political agreement to put limits on bankers’ annual bonuses and to adopt new rules on bank capital requirements. (MEPS Cap Bankers’ Bonuses and Step Up Bank Capital Requirements, EUROPEAN PARLIAMENT NEWS (Feb. 28, 2013).) The new measures are opposed by <?Britain, however, which fears that its banks may lose a competitive edge and may be forced to move to more attractive financial centers. (Britain on a Collision Course over EU Bank Bonus Plan, EURACTIV.COM (Mar. 7, 2013).)

Under the draft rules, bankers’ annual bonuses must not exceed their annual salary. In exceptional cases, the bonus may reach twice the salary, provided that 65% of shareholders owning half the shares represented, or 75% of votes if there is no quorum, agree to the increase. In addition, with a view to encouraging bankers to make long-term plans to remain at the bank, if the bonus exceeds the annual salary, then 25% of the entire bonus would be deferred for at least five years. (Id.)

With regard to their capital, banks would be required to hold a minimum of 8% “good quality” capital, which is mainly Tier 1 capital, i.e., the type of capital that bears the lowest risk. (MEPS Cap Bankers’ Bonuses and Step Up Bank Capital Requirements, supra.) Tier 1 capital, deemed the best form of bank capital, comprises money that the bank has in order to support all the risks it takes: lending, trading, etc. (Core Tier-One Capital, FINANCIAL TIMES LEXICON (last visited Mar. 19, 2013).) Banks would also be required to make public any profits made, taxes paid, and subsidies received, country by country. (MEPS Cap Bankers’ Bonuses and Step Up Bank Capital Requirements, supra.)

The Proposed Changes and the Basel Agreements

The new draft rules are part of a package of proposals consisting of a directive and a regulation that the European Commission had adopted in July 2011 to replace two 2006 Capital Requirements Directives in order to comply with Basel II requirements and to establish a more secure financial system. (European Commission, New Proposals on Capital Requirements (CRD IV) Package, EUROPA (last updated Nov. 26, 2012).)

Basel II, initially published in 2004,is a voluntary agreement between the banking authorities of the major developed countries that revised the Basel Accord of 1988 and introduced the concept of three “pillars” as a framework for addressing various aspects of capital requirements and risk management for credit institutions. The 1988 Accord, which is now referred to as Basel I, as well as Basel II, were reached by the Basel Committee on Banking Supervision (BCBS), an international body based in Basel, Switzerland. (The Basel Accord and Capital Requirements Directive, The Financial Services Authority (UK) website (last updated Feb. 22, 2013).)

The recently proposed changes are intended to comply with Basel III reform measures, which were designed to improve the regulation, risk management, and supervision of banks after the financial crisis. Basel III requirements were developed by the BCBS in 2010, in the midst of the global financial crisis. (Basel Committee on Banking Supervision, International Regulatory Framework for Banks (Basel III), Bank for International Settlements website (last visited Mar. 15, 2013).)

In January 2013 and during the discussion of the EU draft rules on banks, Michael Barnier, the European Commissioner for Financial Services, called upon certain other member countries of the Basel Committee on Banking Supervision to take similar actions to comply with Basel III. He stated, “[i]t is essential that the United States and Brasil [sic] and Russia apply the same rules that we decided together. It is a condition for world financial stability, not only for the G20, but for global stability.” (John O’Donnell & Jan Strupczewski, EU’s Barnier Says U.S. Should Respect Basel III, REUTERS (Jan. 31, 2013).)