Once again proving more adept at reining in the financial sector than its US counterpart, the European Union's parliament on Thursday approved a plan for new restrictions on banks operating on the continent that would cap bonuses for financial executives and bankers.
Outsized bonuses have been part of the modern culture of financial giants around the world and are largely credited—by fostering perverse incentives on behalf of bank executives—with setting the stage for the economic collapse of 2008.
The new rules would keep bonuses in Europe strictly tied to base pay that could not exceed a 1:1 ratio without shareholder approval, and even then could only be increased to 2:1.
Investment bankers and financial elites predictably bemoaned the decision, but critics of Wall Street hegemony took that as a sign that the EU plan was at least on the right track.
As Reuters reports, the deal finalized in Brussels on Wednesday would apply new rules
to Europe-based employees of any bank, as well as to staff of European banks wherever they are based. That means a Deutsche Bank employee working in New York or Tokyo would be subject to the limits, as would a Goldman Sachs banker posted to London, although that provision may later be reviewed.
The Associated Press adds:
Some details for the corresponding legal texts — the package is more than 1,000 pages thick—still have to be hammered out, but the final approval by parliament and government leaders of the package is expected to be a formality, ensuring the laws come into force next year.
One sticking point is that under the provisional agreement, the bonus cap will also be mandatory for European banks' employees overseas, for example in New York — a point that particularly irks Britain, which is home to Europe's biggest financial industry.
That provision is said to be under ongoing review, but Othmar Karas, the Austrian lawmaker who helped negotiate the deal, was clear in saying, "There will be no exceptions."
"It goes for all banks inside and outside the European Union and for all foreign banks inside the European Union."