The Capital Requirements Directive IV will write into EU law those international guidelines for how much reserves our banks need to hold to absorb potential losses. In the commission’s proposal, the minimum requirement for capital remains at 8% of a bank’s risk-weighted assets, but 4.5%, rather than the current 2%, will have to be of the highest quality (known as common equity tier 1, or CET1). If a bank’s capital falls below that, it’s no longer allowed to operate. On top of that, CRD IV introduces several additional capital cushions, all consisting of CET1. A capital conservation buffer of 2.5% of risk-weighted assets is meant as a further layer to prevent the need for government bailouts.
Although it wasn’t part of the commission’s proposal, one of the key demands from the Parliament is to put a cap on banks’ bonus payments. In the regulator’s view, this could prevent high level managers and bankers from taking serious risks in their activity to augment their revenues. Michel Barnier, the EU Commissioner in charge of financial regulation, underscored the depth of emotion on the issue when he spoke to EU finance ministers. “Some bankers took ever greater risks because they were being paid from an unlimited bonus pool,” he said, referring to the global financial crisis.
But the UK does not look satisfied with the agreement. Chancellor George Osborne was isolated among his EU counterparts as he lobbied to water down a European cap on bankers’ bonuses. “It will push salaries up, it will make it more difficult to claw back bankers’ bonuses when things go wrong, it will make it more difficult to ensure that the banks and the bankers pay when there are mistakes, rather than the taxpayer,” said Osborne. Nevertheless, no one stood by him at the meeting.
Rapporteur Othmar Karas (EPP, Austria) said: “I do not see any reason to reopen the political compromise package we found last week.” During this ministerial meeting, the Irish Presidency gained a large majority in favour of the compromise with the EP apart from the “limits on bonuses” problem raised by the UK.
The consequence? The European banking system stability and the safeguard of the States public budgets now depend on bankers bonuses.