By Rainer Buergin and Gonzalo Vina
Sept. 18 (Bloomberg) -- European Union leaders said the Group of 20 nations should agree on binding rules backed by national sanctions to curb bank bonuses, a week before a summit of the top industrial and emerging nations in Pittsburgh.
The EU agreement on the need for action failed to include details of how such curbs would be achieved, leaving any details to be negotiated at the G-20 summit. Leaders of the 27 EU states said voters would react with anger if bankers were allowed to award themselves large bonuses while relying on public money for their survival.
“The bonus bubble burst tonight,” said Swedish Prime Minister Fredrik Reinfeldt, whose country holds the EU’s rotating presidency, after chairing the meeting in Brussels late yesterday. “We have agreed to say that ‘enough is enough’ and that we need to move away from the current culture of compensation based on short-term performance.”
Leaders agreed that bonuses should be tied to a bank’s performance and that guaranteed bonuses should be avoided. The “major part” of bonuses should be deferred and “could be canceled in case of a negative development in the bank’s performance.”
U.K. Prime Minister Gordon Brown said officials were still negotiating over whether bonuses should be kept to a proportion of revenue instead of profits. He said a “limitation on individual bonuses” was also being discussed.
“People have put forward a number of proposals,” Brown said. “What we are looking for are common international rules that can suit every country with the minimum of interference and a maximum of impact.”
‘Rules on Bonuses’
Asked whether Europe would go it alone if the G-20 failed to agree on curbing bonuses, European Commission President Jose Barroso said the EU’s executive arm has already “put on the table” some “precise rules on bonuses.”
These are “not only recommendations but legally binding proposals,” Barroso said. “So whatever the result of Pittsburgh, the commission position is: ‘yes,’ we should adopt in Europe some of these rules.”
Yet differences over bonuses highlight the difficulties the world’s leading industrialized and emerging economies face as they seek agreement on measures to prevent a recurrence of the worst financial and economic crisis since World War II.
Michael Froman, a deputy assistant to U.S. President Barack Obama said two days ago that the U.S. is reluctant “to set individual compensation levels.”
Sanctions
Also, even though Brown has joined German Chancellor Angela Merkel and French President Nicolas Sarkozy this month in calling for G-20 leaders to impose binding global rules on bonuses, and back “sanctions” for banks that refuse to cooperate, other differences remain.
The U.K. has rejected signing up to proposals that would have any national government set a cap on bonuses, suggesting countries will implement any agreement in different ways.
Chancellor of the Exchequer Alistair Darling earlier this month signed up to a G-20 pledge to ask regulators to study ways of tying a bank’s bonus pool to regular wages, rejecting a cap for individual firms.
“We need a cap for the bonuses as part of your income, or part of the revenue of the company” that a person is working for, Reinfeldt said. “We, of course, know that the United States is very often against this idea.”
Merkel said bonus payment limits are one of her top goals for the G-20 summit.
Tie to Profits
“I’m optimistic that we can make clear that bonus payments must be tied to long-term profitability,” Merkel said, adding that such payments can’t be granted when companies make losses.
Europe and the U.S. may also struggle to reconcile their views on capital requirements for banks. BNP Paribas SA Chief Executive Officer Baudouin Prot said the “very high” capital ratios proposed by the U.S. would put French and other European lenders at a disadvantage to their U.S. competitors.
Sarkozy said that imposing tougher requirements on banks to maintain capital reserves would help curb bonuses.
“The idea of raising capital requirements in proportion with speculative activities, which are generating these so shocking bonuses, seems a more efficient capping method,” Sarkozy said
At a preparatory meeting of European finance ministers and central bank governors in London on Sept. 5, French Finance Minister Christine Lagarde said the G-20 should amend and enact the so-called Basel II rules before discussing any new rules.
Leaders of advanced and emerging economies will discuss steps to regulate markets, curb executive pay and raise capital requirements for banks at the Sept. 24-25 summit in Pittsburgh, the latest bid to coordinate the global response to the crisis.
Merkel, speaking in Frankfurt yesterday, urged G-20 members to agree “that no financial center, no financial institution and no financial product remains unregulated.” Capital requirements must be designed to limit banks’ size, she said.
To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Gonzalo Vina in Brussels at gvina@bloomberg.net. News Courtesy Bloomberg.com
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