BRUSSELS – Britain stood isolated against a broad majority of European Union countries Tuesday in refusing to back legislation that would strictly limit bankers’ bonuses.
Treasury Chief George Osborne said at a meeting of the bloc’s 27 finance ministers in Brussels that Britain, home to one of the world’s largest financial industries, can’t support the current proposal to limit bonuses as it would “undermine responsibility” in the banking system.
But Irish Finance Minister Michael Noonan, who chaired the ministers’ meeting because his country hold the rotating EU presidency, concluded there is a “broad majority” in favour of the legislation, giving the necessary green light for finalizing technical details toward a formal vote on the package by the ministers next month.
The bonus cap is part of a sweeping 1,000-page package of financial laws that would require banks starting next year to hold more capital and liquidity reserves to shield taxpayers from having to pay for more expensive bailouts. It would also lay the groundwork for a single banking supervisory mechanism for the group of 17 European Union countries that use the euro.
Not only does this new bonus cap — set at one year’s base salary or double that if a large majority of the bank’s shareholders agree — affect all of Europe’s banks but it will also be mandatory for European units of foreign banks and the employees of EU banks working overseas, for example in New York.
European officials are trying to avoid forcing the legislation through without Britain’s consent — a politically toxic move given the already significant level of euro-skepticism in the U.K.
German Finance Minister Wolfgang Schaeuble Tuesday insisted “it would be better” to reach consensus, expressing hope that changes in the legislation’s fine print this month might yet convince Britain to support the measure.
Being isolated on such important legislation, which significantly changes the rules for what is one of Britain’s main industries, comes as another blow to Conservative Prime Minister David Cameron’s uneasy relationship with the EU. He sees the Brussels as meddling too much with the member states’ own business. Cameron has vowed to renegotiate his country’s ties with the EU and hold a referendum on Britain’s membership in a few years.
Britain has said it fears the bonus cap could harm the financial sector in London, one of the world’s largest, and hamper growth. Proponents of the cap say the high payments encouraged bankers to take massive risks at the expense of the long-term future of their businesses, which helped to destabilize the financial system in 2008.
Osborne told the meeting that Britain understands the public’s sentiment that bankers must be made more accountable and that the country has already introduced rules on bonuses, shifting them more toward long-term incentives and including legal possibilities to claw back bonuses.
But, he added, “Our concern is it may have a perverse effect, in other words, undermine responsibility rather than promote responsibility in the banking system.”
The current proposal, Osborne warned, “will push salaries up, it will make it more difficult to claw back bankers’ bonuses when things go wrong.”
“I can’t support the proposal currently on the table,” he said, urging Ireland to improve the proposed legislation by continuing negotiations with the European Parliament.
But Noonan made it clear that the time for major changes was up after the current compromise with the European Parliament was reached last week after arduous months of negotiations. The European Parliament had threatened to hold up approval of the entire package — a key part of the region’s implementation of the internationally agreed Basel III rules on banking — a delay that the bloc, shaken by a three-year-old debt crisis, was keen to avoid.
“We firmly believe further negotiations with Parliament will not help very much,” said Noonan, noting the lawmakers’ insistence on the bonus cap.
Joerg Asmussen, a member of the European Central Bank’s executive board, welcomed the agreement on pressing ahead with the package of legislation, saying “it is important that the agreed measures not only increase the resilience of individual institutions but also aim at setting the right incentives for bankers to take a long term view in their decisions.”
“This is key for ensuring stability in the financial system as a whole,” he added.
Juergen Baetz can be reached on Twitter at http://www.twitter.com/jbaetz