EU bonus cap 'good news for savers'

EU flagStrict limits on the size of bank bonuses should be in force next year after final approval of bonus caps by MEPs.

UK opposition failed to stop a deal between European Union (EU) governments last month to cap bonuses at a maximum of twice their annual salaries.

Chancellor George Osborne warned the move would drive banking business away from the EU and, crucially for the UK, away from the City of London as the EU's leading financial capital. Critics have also warned it will just encourage banks to boost salary rates to compensate for curbing bonuses.

But, on Tuesday, MEPs endorsed bonus restrictions as part of a wider scheme forcing banks to increase liquidity and set aside more money to give extra help to small businesses - delivering the toughest EU banking rules so far in a "banking union" governing 8,200 banks in 27 countries.

Liberal Democrat MEP Sharon Bowles, who steered the deal through the European Parliament, insisted a bonus cap was needed across the European banking sector. She said: "Realignment of the pay/bonus ratio to reasonable proportions reduces perverse incentives to risky behaviour even if total pay stays the same."

Labour MEP Arlene McCarthy said: "It is the failure of banks to self-regulate on bonuses or to exercise restraint that has now resulted in a bonus cap which aims to put an end to the excessive risk culture which lead to taxpayer bail-outs and bank collapses. Tories yet again failed to support reform in bankers' bonuses. This is a Government that is happy to cap public-sector pay in times of austerity but reject a cap on bankers pay.

"These new rules will still allow a trader earning £236,000 to take home a total annual salary of two times their basic pay of £708,000, while government cuts mean that an estimated additional 230,000 people in my region, the North West, will have to access food banks in 2013."

The bonus rules are part of the new Capital Requirements Directive which obliges EU banks to set aside more capital as a cushion against economic shocks, encourages them to boost lending to small and medium-sized firms, and imposes strict new supervision and disclosure requirements.

European Parliament President Martin Schulz commented: "This vote marks a milestone in our efforts to make the financial system more secure and transparent. It is good news for hundreds of millions of savers in Europe and across the world.

"The cap on bonuses is needed to change the culture of excessive risk-taking at many banks that endangers people's savings in the pursuit of short-term profit."
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