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Britain Isolated as European Colleagues Support Bonus Caps Britain Isolated as E.U. Ministers Support Bonus Caps
(about 7 hours later)
BRUSSELS — The British government faced isolation Tuesday after finance ministers from across the European Union rejected demands to water down new rules imposing strict caps on bonuses earned by bankers. BRUSSELS — The British government stood isolated on a key European Union issue Tuesday, after finance ministers from elsewhere in the bloc rejected London’s effort to water down proposed limits on bankers’ bonuses.
The rules, which would apply to bankers working in the 27-nation bloc and those working for E.U.-based banks worldwide, are an acute concern for the Britain’s chancellor of the Exchequer, George Osborne, who is seeking to keep London, Europe’s main financial hub, competitive with other centers of finance like New York, Singapore and Hong Kong. The ministers, taking up rules provisionally approved last week by representatives of the European Parliament and member states, broadly agreed Tuesday to cap bonuses at no more than twice the level of salaries for bankers working in the 27-nation Union and for those working for European-based banks worldwide. The ministers did, though, leave the door open for further concessions that could bump some bonus awards slightly higher.
But finance ministers arriving at a monthly meeting in Brussels suggested that there was little scope to assuage Mr. Osborne. The bonus caps, which would require formal approval by a majority of E.U. member states, among other steps, are aimed at reining in the risky, but potentially high-reward, behavior that contributed to the financial crisis. British officials and bankers have warned that the bonus limits could make it more difficult to keep London, Europe’s main financial hub, competitive with financial centers like New York, Singapore and Hong Kong.
“The British authorities have problems with the banker bonus issue,” but “now there is very little further we can do for them,” said Michael Noonan, the finance minister of Ireland. During the ministers’ meeting in Brussels, George Osborne, the British chancellor of the Exchequer, told his colleagues that the measure could have the “perverse” effect of pushing up fixed salaries, making it harder to punish bankers for bad investments or ethical lapses by “clawing back” their bonuses.
Ireland holds the rotating presidency of the Union and helped to broker talks last week with legislators on the draft law. “We pushed the negotiations to quite a degree and we got the best possible compromise,” Mr. Noonan said. But facing almost certain defeat over the issue, Mr. Osborne struck a conciliatory tone, saying he would endorse the rules “if we make progress in the next couple of weeks.”
Jeroen Dijsselbloem, the Dutch finance minister, said Tuesday his country was aiming to impose even tighter rules than those under discussion at the European level and that the measures were politically important. The rules are drafted so that a banker working in New York for a British bank like Barclays would be subject to the rules, as would a banker in London working for a U.S. bank like Citigroup. Only if a bank’s shareholders approved could a bonus be higher — and even then it would be limited to no more than double the salary.
“I think the banking sector needs to be in a strong relation with the real economy, and with real people, and real people are very worried about the way things are running in the financial sector,” said Mr. Dijsselbloem, who also is the president of the Eurogroup of finance ministers from countries using the single currency. British officials, speaking on the condition of anonymity, said their government would seek to increase the allowable limits on some types of bonuses given in the form of stocks or bonds that would vest in the future. But the legislation is expected to pass mostly in its current form, as long as a majority of member states approve.
Pierre Moscovici, the French finance minister, said late Monday that his country was opposed to any modifications to accommodate Britain. “I don’t think at all that it’s necessary to adapt the arrangement that’s on the table today to try and keep this or that country on board,” Mr. Moscovici said during a news conference. “It looks like the key points will hold,” said Philip Davies, a partner in London at Eversheds, a law firm. He predicted that the bonus cap would put the City, London’s financial district, at a competitive disadvantage to banking hubs like Wall Street and Hong Kong. “The long-term effect on the City remains to be seen.” he said. “But as it now stands, alternative jurisdictions that are able to offer more favorable terms look to have a significant recruitment edge.”
The bonus legislation cleared an important hurdle last week when representatives of E.U. governments and the European Parliament agreed that the coveted bonuses many bankers receive would be capped at no more than their annual salaries, starting next year. Only if a bank’s shareholders approved could a bonus be higher — and even then it would be limited to no more than double the salary. Banks are fretting how the proposed caps on bonuses would affect them, according to several legal experts that are advising firms based in the City. Some are even seeking legal advice over whether the European officials have the authority to limit bonuses.
The rules are drafted so that a banker working in New York for a British bank like Barclays would be subject to the rules, as would a banker in London working for a U.S. bank like Citigroup. While no bank appears to be ready to take the issue to court, experts say such a move would remain a possibility as long as questions about how the bonus caps will work remain unanswered.
Britain does not wield a veto because the legislation is expected to pass as long as a majority of member states approve. The E.U. finance minsters could decide on Tuesday to give the rules their political approval. But Britain may still have additional weeks, or even months, to press for concessions because important details still need to be nailed down. When Michel Barnier, the European commissioner responsible for financial regulation, was asked Tuesday whether he thought any kind of legal challenge would be successful, he replied, “Good luck.”
“There’s room for technical amendments to be put in place,” Mr. Noonan, the Irish finance minister, said. “We’ll leave scope for that.” Some financial firms also are looking at ways to devise compensation packages around long-term incentives that would allow bankers to receive sizable compensation despite the new controls. Yet advisers acknowledge that it will be difficult for leading banks to defend any such workarounds, because of the widespread public anger against the industry’s past excesses.
Yet Mr. Osborne faces a dilemma over how strongly to argue for changes. Mr. Osborne’s political foes immediately focused on the E.U.’s rebuke, saying it was a sign that the Conservative government led by David Cameron, which has called a referendum on Britain’s membership in the Union, was increasingly unable to influence policy making in Europe.
He faces acute pressure from members of Britain’s ruling Conservative party who favor taking a tough line against European rules that dent British interests. The party faces a growing challenge from the UK Independence Party, which wants to pull Britain out of the Union. “This government needs to take a crash course in finding friends and influencing E.U. partners,” said Arlene McCarthy, a member of Britain’s Labour party in the European Parliament, who also is a senior member of the chamber’s Economic and Monetary Affairs Committee.
But supporting high pay for bankers is politically toxic among the significant sections of the British electorate who resent the outsized remuneration. Many voters also resent the banking industry for receiving a series of giant bailouts paid for by taxpayers. Ms. McCarthy said she supported the cap as the only way to rein in bankers. But she complained that the Cameron government failed to win more favorable terms for the City “because of a kind of arrogance” toward its partners in the Union.
Mr. Osborne also may rein in his criticism because the rules are part of a legislative package that includes something his government favors: tougher rules about how much capital European banks most hold in reserve to protect against losses. Ireland, which holds the rotating presidency of the Union, helped to broker talks on the bonus cap last week with legislators of the European Parliament. On Tuesday, Michael Noonan, the finance minister of Ireland, said there was “now there is very little further we can do for” Britain.
“I hear he’s worried,” said Mr. Dijsselbloem, the Dutch finance minister, on Tuesday morning, referring to Mr. Osborne. “We’ll see how it goes today.” “We pushed the negotiations to quite a degree and we got the best possible compromise,” Mr. Noonan said.
The meeting on Tuesday follows a narrower gathering of euro-area ministers on Monday night that focused on Cyprus. The island nation requires a bailout of around €17 billion to shore up government finances and its banks, which were badly exposed to a debt write-down in Greece. To a great extent, Mr. Osborne was in a bind over how strongly to argue for changes. From one side, he was under acute pressure from members of the Conservative party who favor taking a tough line against European rules that they consider at odds with British interests.
A key obstacle to the long-delayed deal are suspicions among prominent lawmakers in Germany and other euro zone countries that Cyprus has become haven for laundering Russian wealth. Adding to that pressure is the growing challenge from the U.K. Independence Party, which wants to pull Britain out of the Union.
Mr. Dijsselbloem said after that meeting broke up that political approval for a Cypriot bailout could happen during the second half of March. On the other hand, supporting high pay for bankers is repellent to significant sections of the British electorate, who are struggling in a weak economy. Many voters also resent the banking industry for receiving a series of giant bailouts paid for by taxpayers.
He added that agreement had been reached with the Cypriots after face-to-face talks with the country’s new finance minister, Michalis Sarris, on an independent review of how Cypriot banks are implementing anti-money laundering laws. Mr. Osborne also needed to temper his criticism because the caps were part of a legislative package that included something his government favors: tougher rules about how much capital European banks most hold in reserve to protect against losses.
But Mr. Dijsselbloem also declined to rule out forcing depositors in Cypriot banks to share in any losses, a move that is opposed by the new government in Nicosia. Mark Scott contributed reporting from London.
At a separate news conference shortly afterwards, Mr. Sarris bluntly ruled out any losses, or haircuts, for depositors, saying that such measures would deliver a “self-inflicted wound” to the euro area by denting confidence in banks.
He added that any attempt to penalize Russian depositors specifically would be totally unacceptable.
“It would border racism to distinguish depositors by ethnic origin,” he said.
Mr. Sarris said the anti-money laundering review would be carried out by Moneyval, a group of financial experts that is part of the Council of Europe, in cooperation with experts from the private sector. He said the review could begin as soon as March 12 and be completed by the end of month.
There still is a danger of a standoff between Cyprus and the so-called troika of foreign lenders — the International Monetary Fund, the European Commission and the European Central Bank — over the terms of any deal.