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EU weighs firm cap on banker bonuses

BRUSSELS (AP) -- Top European Union officials are holding eleventh-hour discussions on a package of financial laws that would include a firm cap on bankers' bonus payments.

The negotiations Wednesday between the European Parliament, the Commission and officials representing the bloc's 27 governments primarily aim to introduce higher capital requirements for banks, the so-called Basel III rules. But Parliament also wants the package to include a limit on bankers' bonus payments.

Under the proposed rules, bonuses would not be allowed to exceed a person's fixed annual salary, or double that if three quarters of a bank's shareholders agree. Top bankers and traders may currently earn bonuses multiple times their base salary based on their performance, given that there's no legal pay limit.

Britain, home to Europe's biggest financial industry, vehemently rejects the proposal, saying the rules will drive away talent and hamper growth. London has been trying to rally other EU governments behind its position, but to little effect, according to EU diplomats. Most governments have indicated they'll accept the bonus cap to ensure the more important Basel III rules come into force by January 2014.

Public outrage has grown across Europe over large bonus payments to executives of banks that received huge state bailouts during the financial crisis, leaving few governments willing to jeopardize an important financial reform package for an unpopular issue such as ensuring that bankers and traders can still get bonuses several times their base salary.

Proponents of the bonus cap say the payments encouraged bankers to take massive risks at the expense of the long-term future of their businesses, which helped to destabilize the financial system.

“This will help tackle the culture of excessive risk-taking and the bending of rules that has now become endemic to banking,” said Sony Kapoor, head of the economic think tank Re-Define. “It will reduce the risks borne by tax-payers and go a long way to rehabilitate the industry, making it focus on serving the real economy again,” he said.

The negotiations on the package have been dragging on for 10 months. After a meeting last week broke down without a compromise, Parliament gave the EU governments an ultimatum until Wednesday's negotiating session.

If the talks again fail to yield an agreement, Parliament will take the matter to its plenary and open a different negotiation process that would slow down the entire package by at least several months _ something EU governments want to avoid.

If a deal is agreed Wednesday, the final approval by parliament and government leaders is expected to be a formality.

Even if Britain does not approve the package, it could in theory be adopted by qualified majority. But forcing legislation against the wishes of a key EU member like Britain is a step many European states might be reluctant to take.

Another proposal in the package that the EU negotiators are weighing is whether large banks that are considered to be big to be allowed to collapse should be forced to hold yet more capital.

The overall package, including the tougher capital requirement banks, are part of global efforts to prevent another shock to the financial system like that prompted by Lehman Brothers' 2008 collapse, when banks were highly leveraged while enjoying low capital requirements. The lack of solid financial cushions meant that many banks were vulnerable, and eventually required taxpayer-funded bailouts to avoid bankruptcy.


Juergen Baetz can be reached on Twitter at http://www.twitter.com/jbaetz

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