Caps and Capital Requirements

Wednesday 06 March 2013 19.04

George Osborne's blushes were spared when a vote on bankers' bonuses was deferred

By Sean Whelan, Economics Correspondent

In the usual way of Brussels stories, a local political win has hogged the headlines, obscuring another story of great consequence.

Yesterday’s nod of approval by the ECOFIN council for the Troika to look at an optimal way for Ireland and Portugal to re-profile some of their official lending was not the main item on the agenda.

That honour fell to the Capital Requirements Directive number four, or CRD IV in EU shorthand.

This is a hugely important piece of legislation designed to improve the quality and quantity of capital held by banks to make them safer, and to reduce the need for future taxpayer bailouts.

CRD IV is the European law that will implement something called Basel III – the global rule book for banks drawn up under the auspices of the G-20. So everybody everywhere is going to have to play by these new rules of the banking game.

Britain, home to the world’s number one financial services centre, the City of London, has been a strong backer of better capital requirements for banks. But yesterday the UK finance minister George Osborne found himself a lone voice of opposition in the Council.

Very kindly, Michael Noonan did not embarrass the poor chap by putting the matter to a vote.

If he had, Britain would have lost, as this – like most EU business these days – is done by qualified majority vote, so there are hardly any national vetoes.

Mr Osborne’s objections are not to the core of the legislation, but to an added extra – a strict limit on bankers’ bonuses.

It was the European Parliament that added the banker bonus cap to the legislation, and the MEP’s refused to budge from their position during eight months of negotiations between the Parliament and the Council (i.e. the national finance ministers).

The Irish Presidency reached a compromise agreement with the MEP’s last week, and yesterday put it to the ECOFIN council for approval.

The measure was adopted by a sort of “gentleman’s agreement” – there was no vote, but when Chairman Noonan declared there was broad consensus around the measure – and nobody objected – CRD IV was effectively agreed by the council.

The official press release says the council “broadly endorsed” the compromise reached with the European Parliament and, on that basis, mandated the committee of national ambassadors to the EU -the very powerful COREPER as its known – to tidy up a few loose ends or “technical issues” in order to get a final deal by the end of March.

The President of the European Parliament Martin Schultz was less diplomatic, thundering his outrage that the Finance Minsters hadn’t put the issue to a vote and embarrassed the Brits.

His real objective seems to be to remind people that, since the Lisbon Treaty, the legislative game has changed and the European Parliament is now a force to be reckoned with.

A similar show of force is underway in relation to the EU’s multi-year, trillion Euro budget. The UK recently claimed victory in getting the Council to agree to a substantial real terms cut to the budget. MEPs are not happy, and are working to undo important parts of the deal. Watch that space…

Meanwhile back at CRD IV, the media focus is on the issue of bankers bonuses, with the legislation as it is this week (apparently approved by council and heading back to the Parliament) calls for a 1:1 ratio between bankers’ pay and their bonus payments.

If a majority of shareholders vote to alter this, they can give their favourite banker up to two times his or her salary as a bonus. The City of London types say this restriction will undermine their business model, and lead to a talent and business drain out of the EU.

This case was somewhat undermined last week when Switzerland moved to cap banker bonuses as well.

But the really big impact of CRD IV will be that of its core “product” – the amount of capital banks are required to hold in case they run into trouble – including enough liquid assets to cover 30 days of outflow during “gravely stressed conditions”.

Critics of the whole Basel III process say it will result in less money being available for lending by banks, as they will have to keep more back to deal with possible problems.

Supporters say it will force banks to be more responsible in their lending policies. The same logic applies to the salaries and bonuses issue, say MEPs.

Another thing that emerged for the ECOFIN yesterday is a timing glitch.

The original plan was to have this legislation in force by the first of January. But a couple of states, (Netherlands, Luxembourg and Romania) say they won’t be able to get it through their national systems on time, so the start date may slip, possibly to July next year.

Such slips could be a cause of concern in Merrion Street, as the internal market commissioner Michel Barnier (who is responsible for this legislation) says it’s an indispensible precursor to Europe’s plans for a single banking regulator (the Single Supervisory Mechanism, or SSM).

And the SSM, we are told (especially by German speakers), is an indispensible precursor to any use of the ESM bailout fund to recapitalise banks. And that’s before you get to the politics of trying to persuade governments to use the ESM to deal with legacy bank debts – i.e. buying those banks that have already been recapitalised, Like AIB, PTSB and Bank of Ireland (15%).

 

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