Financial services bulletin - Bonuses at risk
1 June 2012

In July last year the European Commission published its legislative proposals revising the Capital Requirements Directive, comprising a draft Capital Requirements Regulation and a new Directive.

Together the proposals are commonly referred to as CRD IV. The proposals have two key purposes, to implement the Basel III banking reforms and to create a single set of harmonised prudential rules in the EU, commonly known as the single rule book.

On 15 May 2012, the Council of the European Union unanimously agreed a general approach to the CRD IV legislative proposals ahead of talks with the European Parliament.  

The proposals agreed by the Council still contain the key Basel III requirements that banks will have to hold 4.5 per cent core tier 1 capital (comprising common equity) and a further 2.5 per cent countercyclical buffer. However, the Basel III requirements requiring systemically important banks to hold a further 1 per cent to 2.5 per cent of capital were not included.

However, the Council did agree to some concessions including the right for Member States to impose, for up to two years, stricter capital requirements for domestically authorised financial institutions. Also, in addition to the new buffer requirements - the capital conservation buffer and the countercyclical capital buffer - Member States may also apply a systemic risk buffer of up to 3 per cent for all exposures without seeking the prior permission of the European Commission.

The concessions agreed in the Council are key for the UK legislative reform programme announced in the Queen’s Speech in that they allow the Chancellor to move forward with the Banking Reform Bill which is intended to introduce the final recommendations produced by the Independent Commission on Banking.

However, we are not quite there yet as the CRD IV proposals still need to be agreed with the European Parliament. The Chancellor faces a further difficult confrontation in that MEPs have already called for every financial institution to have “robust” governance arrangements including bankers’ bonuses not to exceed fixed salaries - something the City may not take kindly to.

Simon Lovegrove is a lawyer with the financial services team at Norton Rose LLP