Reuters/London

 

EU regulators confirmed yesterday they will cap bonuses of bankers earning more than 500,000 a year and added other conditions to make the pay ceiling harder to smash.

The headline figure was leaked last Friday, triggering warnings by banks in the European Union that they may lose staff to other parts of the world, and that London, the bloc’s top financial centre, could be damaged.

Accounting firm PwC predicted that up to 10 times the number of bankers in London will be hit compared with current pay curbs.

The European Banking Authority (EBA) said the purpose of the draft rules, out for public consultation until August 21, is to have a common pan-EU definition for national regulators to decide which bankers will come within the pay curb net.

The EBA is fleshing out a new EU law that includes the bonus cap, which lawmakers say is needed to crack down on excessive risk taking at banks. The cap will hit bonuses awarded for 2014 and due to be handed out in early 2015.

The EU already applies a tougher version of bank pay limits agreed by world leaders during the financial crisis and the cap will be the toughest curb of its kind in the world.

Lawyers said the EBA’s criteria will mean far more bankers coming within the regulatory net than for existing curbs which are limited to deferring parts of a bonus over several years.

“It will have a disproportionate effect on London as compared to other European centres which have smaller numbers of people earning at this level and will further handicap London’s ability to compete for talent on the world stage,” said Stefan Martin, an employment lawyer at Allen & Overy.

Employee bonuses will be capped if they meet one or more of three conditions related to:

- actual or relative pay

- whether the employee is a major risk taker

- whether bank itself deems the employee’s bonus should be capped.

The EBA also proposed a get out clause.

If employees come within the net only because of how much they are paid, banks can exclude them if they can show the staffer has no material impact on how much risk the lender takes on.

The EBA will hold a public hearing in London on July 4.

Meanwhile, , Italian Prime Minister Enrico Letta said yesterday the European Union must make much faster progress in creating common supervision and rules for its banking sector.

Speaking a day before an EU summit in Brussels, he said the lack of progress on banking union over the last year had undermined the credibility of the EU’s leaders and was a clear example of the region’s inability to follow up “grand announcements” with decisions.

“It’s not acceptable that the banking union decided a year ago is still lacking any precise form,” Letta said in a speech to the Senate.

European Central Bank Executive Board member Joerg Asmussen said last week he believed that banking union, with a single supervisor and a common mechanism for winding up failed lenders, could be in place by the summer of next year.

Those remarks put Asmussen at odds with German Finance Minister Wolfgang Schaeuble, who has said a single agency to restructure or close failed banks can only be established if the EU’s treaty is changed, a lengthy and complex process.

Letta, who is trying to win room from the EU to allow Rome to spend more to help its struggling economy, said the lack of progress on banking union was emblematic of a broader EU malaise.

“The EU cannot continue to be timid and lack decisiveness as it has up to now, if it does not step on the accelerator it will implode,” he said, calling for a sharp shift of focus to jobs and growth rather than austerity.

Within his broad, left-right coalition there is increasing frustration with EU austerity and the approval rating of his government, formed less than two months ago, sank to 34% from 43% last week, a poll by the SWG agency showed.

Letta warned that unless the EU changes course there will be a continued rise in support for anti-establishment protest parties such as the 5-Star Movement which won a quarter of the votes in Italy’s national elections in February.

Italy, the eurozone’s third largest economy, is languishing in its longest post-war recession and after a decade of stagnation the economy is smaller now that it was in 2001. Youth unemployment has climbed to almost 40%.