Published on TheNewFederalist.eu
Last week the EU Financial Ministers agreed on a compromise on the reform of prudential banking rules (CRD IV-CRR) that adapts at the European level international prudential banking rules under the Basel III agreement, adopted by the Basel Committee. It provides for stricter capital requirements to be imposed on some 8,000 European banks. The agreement has not been officially dealt because of the UK’s opposition to caps on bankers’ bonuses as foreseen by the new EU directive. Now the Irish Presidency of the EU, negotiating on behalf of the Council, has a few weeks to try to convince the UK to back a compromise.
The Capital Requirements Directive IV will write into EU law international guidelines for the level of financial reserves banks need to hold to absorb potential losses. In the commission’s proposal, the minimum requirement for capital remains at 8% of a bank’s risk-weighted assets, but 4.5%, rather than the current 2%, will have to be of the highest quality (known as common equity tier 1, or CET1). If a bank’s capital falls below that, it’s no longer allowed to operate. On top of that, CRD IV introduces several additional capital cushions, all consisting of CET1. A capital conservation buffer of 2.5% of risk-weighted assets is meant as a further layer to prevent the need for government bailouts.
Although it wasn’t part of the commission’s proposal, one of the key demands from the Parliament is to put a cap on banks’ bonus payments. In the regulator’s view, this could prevent high level managers and bankers from taking serious risks in their activity to augment their revenues. Michel Barnier, the EU Commissioner in charge of financial regulation, underscored the depth of emotion on the issue when he spoke to EU finance ministers. “Some bankers took ever greater risks because they were being paid from an unlimited bonus pool,” he said, referring to the global financial crisis.
But the UK does not look satisfied with the agreement. Chancellor George Osborne was isolated among his EU counterparts as he lobbied to water down a European cap on bankers’ bonuses. “It will push salaries up, it will make it more difficult to claw back bankers’ bonuses when things go wrong, it will make it more difficult to ensure that the banks and the bankers pay when there are mistakes, rather than the taxpayer,” said Osborne. Nevertheless no one stand by him at the meeting.
Rapporteur Othmar Karas (EPP, Austria) said: “I do not see any reason to reopen the political compromise package we found last week”. During this ministerial meeting, the Irish Presidency gained a large majority in favour of the compromise with the EP out of the “limits on bonuses” problem raised by the UK.
As a result, the European banking system stability and the safeguard of the States public budgets depend on bankers bonuses.