Caps on bonuses and funds to help with the crisis -Voila the new banking regulations

Karas: “it is the most courageous measure approved in Europe to date”
Stop on mega bonuses; step up capital provisions to guarantee solvency and total balance sheet disclosure

From the Correspondent Alfonso Bianchi

The EU Parliament gave the go ahead to the “most courageous banking regulations approved in Europe of to date.” That’s how the European People’s Party speaker Othmar Karas defined it. “The combination of rules valid for all 8,200 banks is the foundation upon which the EU must construct the banking union” the Austrian politician affirmed. It concerns a reform package that includes a cap on banker’s bonuses to curb risk-taking and stepping up capital provisions of the banking institutions as well as to make it easier for banks to lend to small and middle size businesses.

“STRONGER SYSTEM” – After more than 30 cycles of negotiations this agreement will make our banking system stronger and will bring us in line with International standards,” exalted Sharon Bowles, President of the Commission on Economic and Monetary Affairs. According to the British Liberalist, because of this regulation the EU will even get a step ahead of the USA. They are more complex regulations to allow for the diverse assortment of business models”

CAPS ON BONUSES – Among the most important provisions is the cap on banker’s bonuses that cannot exceed the annual salary, or in extraordinary cases double but only with a 66% consensus of the shareholders. “It is necessary to change the many banks’ culture of excessive risk-taking that endangers people’s savings to look for short-term profits” declared the President of the European Parliament. This provision was strongly opposed in London for fear of losing their best sector leaders; this will not please bankers like Alfredo Sàenz from the Spanish Banco Santander either, who earned 16 million dollars in bonus alone in 2011. “As legislators we do not regulate the salary levels – explained Karas. According to him, the regulations on banker’s bonuses will instill fairness and transparency and contribute to a change in banking culture.” In other words, the institutes can pay their directors as much as they want but they will have to make the decision ahead of time and not just tie it to their results.

SECURITY RESERVES – Like a parachute in case of crisis, the European banks will be required to put at least 8% of capital aside (cash, bonds, shares or loans), as a reserve for difficult times. Of these at least ½ must be Tier 1 (now the requirement is 2%); this is high quality capital that allows institutes to overcome crisis. Furthermore the banks will be asks to provide “reserves of capital conservation” (the so-called ‘capital conservation buffer’) to absorb loss and protect their capital in times of crisis and a “counter-cyclical capital buffer” to guarantee that in times of economic growth they can accumulate a sufficient capital base to enable them to continue to provide a stable supply of credit in difficult periods. “These new regulations are an enormous breakthrough to make the banks stronger and more responsible in case of crisis. But the EU must do much more in the long run,” affirmed Udo Bullmann (S&D).

MORE LOANS FOR SMALL AND MEDIUM ENTERPRISES – To encourage the banks to grant loans to small and middle size enterprises (SME), the new norms will reduce the annual nominal interest rate (NIR) a tax that must be applied to these loans: the lower the NIR, the more convenient the rate. “With the new, less strict capital provisions for loans, the court welcomed the appeal of SME’s, who have been asking for guarantees for access to credit for months” said the Vice President of the European Parliament, Roberta Angelilli (PPE), who reminded them: “In Italy the directive inserted in the European legislation involves 4 million businesses and 23 million people in the entire EU.”

MORE DISCLOSURE – Finally to increase transparency the norms require the banks to disclose all profits made, taxes paid and subsidies received country by country, as well as turnover and number of employees to the European Commission. The banks will be supervised by the authorities in charge of the member states in collaboration with the EBA (European Banking Authority), whose supervisory powers will be expanded. If the UE Council gives the final approval the legislation will go into effect beginning January 2014.