The UK financial sector was dealt a withering blow on Wednesday night when the European Union agreed on moves to slash the bonuses that may be paid to bankers, defeating strong Treasury opposition to the new rules.
A meeting of officials from the 27 countries of the EU with MEPs and the European commission agreed to cap bankers' bonuses broadly at a year's salary, with the proviso that the bonus could be doubled subject to majority shareholder approval. The decision to limit the annual bonuses that may be paid to bank employees came despite stiff British resistance to the move and is certain to have a strong impact on the "fat cat" culture of the City of London, the EU's financial centre.
"For the first time in the history of EU financial market regulation, we will cap bankers' bonuses," said Othmar Karas, an Austrian MEP involved in the negotiations between the parliament and the governments.
The decision to act on bonuses came as part of a broader initiative on bank regulation known as the Capital Requirements Directive aimed at forcing Europe's financial sector to insure itself against the kind of weaknesses of the past five years that triggered an international emergency and frequently left taxpayers footing the bills for bank failures.
The agreement has still to be approved by EU governments before coming into force next year. While details may still be tweaked, it is expected that the main points will become EU law.
Britain, strongly opposed to the new legislation, will not be able to veto it as it will be carried by a qualified majority vote of the EU member states.
The highly complex piece of legislation has been four years in gestation, aimed at setting new equity and liquidity standards for the banks to spare taxpayers the burden of having to shell out for reckless behaviour leading to collapse.
The new rules for the first standardise behaviour for all of Europe's banks, parallel to ongoing efforts to establish a new eurozone banking supervisor, with authority vested in Frankfurt at the European Central Bank.
"This overhaul of EU banking rules will make sure that banks in the future have enough capital, both in terms of quality and quantity, to withstand shocks. This will ensure that taxpayers across Europe are protected into the future," said Michael Noonan, the finance minister of Ireland which currently holds the rotating EU presidency.
Britain sought to block the new rules, not so much because it wanted to dilute the curbs on bankers' bonuses, but because it wanted to retain the power to make its own decisions and not be subject to a regime set in Brussels.
The agreement had to win the endorsement of the European Parliament which still has to vote on the package, but is likely to endorse it. MEPs pushed the bonus caps in particular.
"European banks will have to set aside more money to be more stable and concentrate on their core business, namely financing the real economy, that of small and medium-sized enterprises and jobs," said Karas, the Austrian MEP who led the negotiations for the parliament.
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