Bankers are in the EU Parliament's crosshairs, after the body passed the strictest legislation on massive banking bonuses in the world on July 7. Photo credit: Iain Winfield

The EU Parliament passed legislation strictly regulating banking bonuses. But will it even make a difference?

The European Parliament approved tough new legislation on July 7, cracking down on the massive bonuses given to top executives by financial institutions in the EU. Bonuses will now be heavily contingent on the bank’s future performance through a stipulation that would have up to 70 percent of the bonus deferred by up to five years and tied to share value. Lawmakers hope that these measures will mitigate the culture of risk-taking which was in part promoted by large bonuses and that many claim lead to the global financial crisis.

In her report in The New York Times, Liz Alderman called the legislation “one of the world’s strictest crackdowns on exorbitant bank pay”, and reported that MEPs involved in passing the legislation “said the move would radically transform the bonus culture at banks”. The reform goes steps further than any other banking bonus legislation in that it puts a minimum cap on cash bonuses, among other changes. To that end, Alderman also reported that there is some concern that these constraints could damage the financial sector, with bankers worrying that “compensation restrictions will drive the best people offshore to places like Singapore, Switzerland or Dubai.” The move also comes as the Federal Reserve accuses U.S. banks of dragging their feet in changing compensation practices that “stoke excessive risk-taking”.

The finance world is divided on the legislation and, unsurprisingly, that line seems to be between watchdogs and regulating entities and the bankers themselves. Arlene McCarthy, vice-chairman of the European Parliament’s Economic and Monetary Affairs Committee, told The Telegraph that the reforms would “transform the bonus culture and end incentives for risk taking”, while a “top banker” told the paper that it would be “suicide for the City”.

Martin Flanagan, writing in The Scotsman, welcomed the new legislation, claiming, “Banks have had two years to get their act together on bonuses and persuade society that they are as much concerned with lending responsibly and stabilising the macro-economy as their own pay and perks. They’ve not done it with the rigour the man on the Leith omnibus would recognise. Hence the EU’s iron fist.”

However, not all are convinced that this new legislation will even have an impact on banking compensation practices at all. In a report that came out ahead of the legislation’s passing, the Financial Times claimed, “The biggest global banks are already doing most of what would be required under the new legislation.” The paper further explained, “Bankers have already adjusted to the fact that, post-crisis, they are going to be receiving far less cash during bonus season, with much of the award paid in deferred stock that vests over several years.”

Alex Brummer, writing in The Daily Mail, complained that banks will likely just change their pay structure all together, raising their base pay and lowering bonuses. Brummer agreed that the new legislation may curb some of the banking sector’s more risky behaviour, but, he added, “it will not make bankers any more popular when large chunks of the population are being asked to accept pay and pension cuts.” Moreover, “There is also the suspicion that the MEPs – who notoriously exploit the EU pay and expenses gravy train – are engaged in a huge exercise in hypocrisy.” Ultimately, bonus regulation may prove “irrelevant”, Brummer claimed. “What will be really important is keeping the weaker banks out of the emergency ward.”