BRUSSELS A new cap on bankers' bonuses agreed overnight in Brussels was hailed by its supporters as a breakthrough to rein in the financial sector, but attacked by critics as a reckless move that would drive bankers abroad or force up base pay.
Bankers in Europe could be barred from getting bonuses bigger than their base salaries as soon as next year, following the agreement on Thursday. If shareholders vote in favour, the cap can be increased to twice base pay, but no more.
The ceiling has been somewhat softened by allowing banks to discount the future value of share options, bonds or other non-cash payments paid out over a number of years, but nevertheless amounts to the toughest limit of its kind in the world.
The rules would apply to Europe-based employees of any bank, as well as to staff of European banks wherever they are based. That means a Deutsche Bank trader working in New York or Tokyo would be subject to the limits, as would a Goldman Sachs banker posted to London, though that provision may later be reviewed.
"There will be no exceptions," said Othmar Karas, the Austrian lawmaker who helped negotiate the deal. "It goes for all banks inside and outside the European Union and for all foreign banks inside the European Union."
Hedge funds and private equity firms will be excluded from the curbs, although they face restrictions on pay later this year under another EU law.
The cap addresses public anger at what many European politicians describe as rampant greed in the financial sector. Many people on the continent blame huge bonuses for encouraging bankers to take the risks that caused the 2008 financial crisis, when banks had to be bailed out with public funds.
Banks argue that without big bonuses they will be forced to increase base pay to keep staff, raising their fixed costs.
"It could result in significantly more complex pay structures within banks as they try to fall outside the restrictions to remain competitive globally," said Alex Beidas, a pay specialist at law firm Linklaters.
The cap could also deepen the rift between Britain - home to the EU's financial capital - and the EU at a time when Prime Minister David Cameron has accused Brussels of having too much influence over domestic affairs and promised a referendum on Britain's membership of the 27-member bloc.
The bonus cap is a setback for the British government, which had argued against such absolute limits and their impact on the City of London, which has 144,000 banking staff and 700,000 people in total working in financial and professional services.
"The United Kingdom is not happy," one European Parliament lawmaker said privately. Britain again expressed reservations about the bonus deal at a meeting of EU ambassadors on Thursday, according to one official who attended.
The backing of a majority of EU states is needed for the deal to be finalised, so Britain would not be able to block it alone. Still, one member of the European Parliament privately signalled that the agreement could yet change, pointing to the "reservations" of some EU countries.
The limit on bankers' pay, which would enter EU law as part of a wider overhaul of capital rules aimed at making banks more stable, will be popular on a continent struggling to emerge from the ruins of the financial crisis.
But in London's Canary Wharf, where many of the globe's biggest banks have offices, professionals were sceptical.
"It's anti-capitalist," said Colin Ellis, who works in the technology division of a bank. "If you have a grocer and he sells loads of fruit, he gets to keep it (the money). When a guy on a trading desk makes loads of money, he deserves to have it."
The Association for Financial Markets in Europe, which lobbies on behalf of some of the globe's biggest banks including Goldman Sachs and Deutsche Bank, criticised the rules on pay, saying they would increase fixed costs.
The European Banking Federation and the German banking lobby expressed similar reservations.
Speaking at a Reuters Summit on the future of the euro zone, Michel Barnier, the European commissioner in charge of regulation, dismissed the idea that the new rules would prompt banks to quit Europe.
But in the United States, some saw it as an opportunity to draw away talent.
"I might be seeing a lot of resumes," said one U.S.-based investment banker at a firm outside the EU, and thus not affected by the proposal. "They will up the salaries, they will try to figure out a way to work within the system, but at the end of the day people who believe they can be better compensated are going to find other places to take their talent."
Ireland, which holds the rotating EU presidency and helped negotiate the deal, will now present it to EU countries. Irish Finance Minister Michael Noonan said he would ask his peers to back it at an EU ministers' meeting on March 5 in Brussels.
Thursday's agreement will also require banks to outline profits and other details of their operations on a country-by-country basis, and they face a 2019 deadline to raise their core capital levels.
The change in the law is set to be introduced as part of a wider body of legislation, known as Basel III, which demands that banks set aside roughly three times more capital and build up cash buffers to cover the risk of unpaid loans.
A ceiling on bonuses, the only one of its kind globally, is perhaps the most radical aspect of the new rules, and runs the risk of establishing an uneven global playing field that could put European banks at a disadvantage in attracting staff.
"If you're the mayor of Mumbai or Hong Kong, today was a good day," said Alan Johnson, managing director of compensation consultants Johnson Associates. "If you're the mayor of London or Paris you may not admit it, but today was a really terrible day. Employment in Europe may go down and taxes (revenues) will go down because the jobs will just go somewhere else."
Many think the reforms, which would be enforced by national and pan-European regulators, will do little to lower pay in finance, where headhunters say some annual packages in London approach 5 million pounds.
An earlier attempt to limit bankers' pay with an EU law forcing financiers to defer bonus payments over up to five years merely prompted lenders to increase base salaries.
But supporters of the latest measure say it would be harder for banks to raise base pay this time because of the higher capital standards that increase their costs and limit how much of their revenue they can pay out to staff.
It could also mean an end to the annual bonus frenzy in London, when newspapers are full of stories of bankers splurging their cash, and it could affect the wider British economy.
About 27 billion pounds of bonuses have been spent over the past decade on real estate in the British capital, according to data compiled by property firm Savills.
Having peaked in 2008 at 11.5 billion pounds, the bonus pool in London fell to 4.4 billion pounds last year, according to research by the Centre for Economics and Business Research. It predicts that pool will be just 1.5 billion pounds this year and fall further in the future.
(Additional reporting by Dasha Afanasieva in London, Arno Schuetze in Frankfurt and Soyoung Kim, Jessica Toonkel, Olivia Oran and David Henry in New York; Editing by Will Waterman and Dale Hudson)