For the first time, legal rules for banker remuneration and bonuses

Although the report of the British Social Democrat Arlene McCarthy is mainly concerned with amendments to the existing European Capital Requirements Directives, it also contains an important part on manager remuneration. Binding remuneration policy principles have now been adopted for the first time. This include a ban on guaranteed bonus payments, the obligation to grant bonuses only on the basis of long-term performance and the ban of “golden parachutes” to sweeten the departure of failed managers. Banks, which receive government aid, will first be obliged to use their profits to pay back these aids and secondly to strengthen their capital base - only then, will they have the opportunity of paying bonuses. The amount of the bonuses was also restricted. A bonus payment must stay in an adequate proportion to the annual salary and only 30 % of the bonuses bar may be paid in cash. These regulations, which were supported by all large parliamentary parties, have been agreed with the Council and will come into force in January 2011.

Wrangling about financial markets supervision

Following months of intensive work, the Economics Committee of the European Parliament has developed a package to reorganise a European financial markets supervision, which includes six dossiers and is supported by the European People's Party, the Social Democrats, the Greens and the Liberals - hence by all four major parliamentary groups. The Member States, in particular Germany and Great Britain, opposed some of the central issues of the package, especially the rights to intervene in national authorities by the European supervisory bodies until the last minute.  A last round of negotiations between Parliament and Council took place during the night from Monday to Tuesday, which, however, was unable to reach an agreement. The Parliament was now faced with the decision to cancel the vote in the plenum, which had been planned for this week, from the agenda or to vote on the package to enter into a second reading because of the lack of agreement by the Council, which would have meant an enormous time delay. In the end one decided on a middle course: all six dossiers were put to the vote and accepted with a broad majority (90 %). The final vote, however, was postponed to September, hence the first reading was not completed. Hence, a window of opportunity remains open during the summer to reach agreement with the Member States. At the same time, the Parliament has sent a clear sign, to which the Council must now react.

Capital requirements provisions and crisis management in the banking sector

Back to the report of Arlene McCarthy: apart from regulating manager remuneration, it also contains stricter capital requirement provisions for special bank transactions, which were identified during the crisis as being particularly risky. The speculative trade with financial products such as shares, options and derivatives and the securitization of loans shall therefore be secured with higher mandatory equity reserves. The new regulations will only come into force at the end of 2011. Apart from that, the EU Commission was authorized to intervene if the overall burden would become too heavy for the banks. The discussion about higher equity quotas for banks is one of the core discussions in the financial market regulation debate. The Commission has already announced further changes to the capital requirements provisions, which are strongly opposed by the financial lobby; last at the meeting of the Institute of International Finance IIF in Vienna, were a “brand new” study was presented, which “proves” that higher equity quotas and regulations would negatively influence the granting loans to the real economy and thereby economic growth and jobs.

Finally, a resolution by the Social Democrat Elisa Ferreira was adopted, which deals with cross-border crisis management in the banking sector and makes recommendations to the Commission. Strong European financial markets supervision, obligatory emergency and liquidation plans for financial institutes in case of insolvency and a stability fund, which should finance future crisis management, are among the issues requested.