EU tightens up bank lending rules and bonuses

There is a drive to ensure that ordinary taxpayers do not end up bailing out banks again

New rules on bankers' bonuses and the amount of capital that banks must hold as a buffer have been approved by the European Parliament by a big majority.

The package was agreed with the 27 EU governments and most of it is likely to take effect on 1 January 2014.

The EU plans to cap bonuses at 100% of a banker's annual salary, or 200% if shareholders approve.

The aim is to curb the sort of high-risk lending that contributed to the financial crash in 2008.

The package, called Capital Requirements Directive 4 (CRD4), brings the EU into line with the so-called "Basel III" rules on banking standards, which set new capital requirements for banks.

MEPs want banks to hold more money in their reserves, in order to stop them going bust through reckless lending. But they have also pushed for banks to focus on lending to the real economy, especially small businesses and business start-ups.

Under the new rules, banks will also have to provide more data about their profits and taxes, on a country-by-country basis.

Bank buffers

The centre-right European People's Party (EPP) - the biggest grouping of MEPs - calls the new rules "the most comprehensive and most far-reaching banking regulation in the history of the EU".

The European Commission President, Jose Manuel Barroso, said the new capital requirements would enable banks to "absorb future shocks themselves, without asking the taxpayer for help".

The rules would also "put an end to the culture of excessive bonuses, which encouraged risk-taking for short-term gains", he said.

EU Internal Market Commissioner Michel Barnier said the new "single rulebook" for banks in the EU would stop "regulatory arbitrage" - the practice of shifting business to countries where the lending rules are more relaxed.

CRD4 will oblige banks to increase the portion of best-quality "core capital" to 4.5%, from the current 2%, that they hold. They have to hold a minimum total capital of 8% of risk-weighted assets - that is, capital held to back the loans that they make.

The credit crunch was a liquidity crisis, so in future, banks will have to be able to meet their liabilities for a period of at least 30 days in times of financial stress.

UK criticism

Last month, UK Chancellor George Osborne stood isolated after EU finance ministers agreed on the plan to rein in bankers' bonuses. The UK's financial sector has a dominant position in Europe, handling by far the highest number of trades daily.

Mr Osborne said the UK already had the toughest regime in Europe for bankers' pay and bonuses and that a cap could "have a perverse effect".

His words were echoed by Vicky Ford MEP, a fellow Conservative politician, who warned that the bonus cap was a "blunt tool" which set a "bad precedent".

She said banks would raise basic salaries to compensate, so the new cap would be counter-productive.

She also argued that the package was "not fully compliant with the Basel III text". But overall, she said, the package would improve EU legislation on banking and represented "a move towards a global standard".

Godfrey Bloom, an MEP in the UK Independence Party, criticised the package as "a triumph of hope over experience", in the Strasbourg parliamentary debate on Tuesday.

"The problem is a flawed banking system... None of this is going to save us from another disaster," he said. He lamented that "what we've had here is criminal activity by bankers and not a single banker sent to prison - this is a disgrace".