At last some rules on banks

Press conference: Political agreement on the new European banking regulation CRD4 (Basel III) has been reached between the two EU legislators, the European Parliament and the Council of the European Union. (European Parliament Audiovisual Library).

Press conference: Political agreement on the new European banking regulation CRD4 (Basel III) has been reached between the two EU legislators, the European Parliament and the Council of the European Union (28.2.2013). (European Parliament Audiovisual Library).

The public outcry against bankers at last produced some tangible results in Brussels. According to a ground-breaking agreement struck between the European Parliament and the Irish Presidency of the Council of the European Union, bankers’ bonuses are capped at the double of their annual salaries. Secondly the capital requirements of the banks are increased to such levels, as to prevent their managers from undertaking extra risks with other people’s money.

The deal was announced by both the EU legislators and the Irish minister of Finance, Michael Noonan, who is currently presiding over the Ecofin Council. The new draft legislation after it is endorsed by the member states will be valid all over the European Union, Britain included, unless London chooses to opt out. As it was expected the first reactions from the London financiers and the City banking community was clear outrage.

But it was not only the financiers who disagreed. After the news broke out, the British Prime Minister David Cameron didn’t lose time and run to express reserves in relation with the possible negative repercussions, from the new draft rules, on the major international banks, based in Britain. He said that he expected the new regulation to provide flexibility in order to allow banks to compete internationally, while being based in Britain. In any case the agreement between the Parliament and the Council was not concluded in absentia of the UK Mission and delegates in the EU.

Fewer bonuses

But let’s return to the substance matter of the new laws. According to an EU Parliament press release, “bankers’ annual bonuses must not normally exceed their annual salaries and banks must hold more high quality capital to increase stability in the sector”. The new rules foresee an exemption for a banker’s bonus to exceed one annual salary and reach the highest allowed maximum of two salaries, only if this is authorised by holders of at least half of a the bank’s shares. In detail this higher ratio would require the votes of at least 65% of shareholders owning half the shares represented, or of 75% of votes if there is no quorum. Many European Parliamentarians fought for a 1:1 ratio from the outset.

More capital

Both those new really tough rules on banks’ capital adequacy and bankers’ bonuses have as a prime target to restrict excessive risk taking in the industry. This practice nearly destroyed the Atlantic economy during the past four years, because it increases the short-term profits and bonuses, but leads invariably to market bubbles and financial crisis.

The current problems of the Western economy, after the 2008 credit crunch in the US and the excessive sovereign debt in Eurozone, were the direct results of bankers’ carelessness. Bank managers and dealers didn’t and still don’t mind at all for the longer term implications of their extremely risky bets, as long as in the short run they turn out super profits and extra high bonuses.

To avoid a total destruction during the past four years European taxpayers recapitalised the banks who found themselves with insufficient capital to absorb losses. This overhaul of EU banking rules will make sure that banks in the future have enough capital, both in quality and quantity. On top of all that these standards have been agreed at G20 level in what is known as the Basel III agreement. The problem is however that the Americans have not yet adopted Basel II.

Ratification process

In any case the new draft legislation is expected to become law within some months, after the political agreement reached yesterday. Of course it has first to be approved by member states and the European Parliament plenary. This vote is expected to take place at the 15-18 April sessions. Once approved, member states would need to include the rules in their national laws by 1 January 2014. And mind you the new legislation will be applicable to all financial firms based in the EU and the approximately 8,000 banks operating in the 27 countries. Possibly at the exemption of Britain.

The dark side

There is no question that if those new draft rules are adopted Eurozone and the European Union as a whole will be a much safer place financially. On the other side of the fence however the strongest resistance and criticism is expected to come from the London’s City. In that square mile of British soil all the major international banking firms have a very strong presence. If Britain adopts these new EU rules their profit-making capacity will be drastically reduced.

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