By John O'Donnell and Claire Davenport
BRUSSELS (Reuters) - A new cap on bankers' bonuses agreed overnight in Brussels was hailed by its supporters as a breakthrough to rein in the financial sector, but dismissed by critics as a reckless move that would drive bankers abroad or force up their base pay.
Bankers in Europe could be barred from receiving bonuses equal to more than their base salaries as soon as next year, following agreement in Brussels on Thursday. Shareholders would be allowed to vote to raise the cap to double base pay, but no higher.
The cap has been somewhat softened by allowing banks to discount future values of shares, options, bonds or other non-cash payments paid out over a number of years, but nevertheless amounts to the toughest limit of its kind in the world.
The rules would apply to Europe-based employees of any bank, as well as to staff of European banks wherever they are based. That means a Deutsche Bank employee working in New York or Tokyo would be subject to the limits, as would a Goldman Sachs banker posted to London, although that provision may later be reviewed.
"There will be no exceptions," said Othmar Karas, the Austrian lawmaker who helped negotiate the deal. "It goes for all banks inside and outside the European Union and for all foreign banks inside the European Union."
The cap addresses public anger at what many European politicians describe as rampant greed in the financial sector. Many people on the continent blame huge bonuses for encouraging bankers to take outsized risks that caused the 2008 financial crisis, when banks had to be bailed out with public funds.
Banks argue that without big bonuses they will be forced to increase base pay to keep staff, raising their fixed costs and making it more difficult to manage their businesses.
"If the cap is implemented, it could result in significantly more complex pay structures within banks as they try to fall outside the restrictions to remain competitive globally," said Alex Beidas, a pay specialist with the law firm Linklaters.
The cap could also deepen the rift between Britain - home to the EU's financial capital - and the EU at a time when Prime Minister David Cameron has accused Brussels of meddling too much in domestic affairs and promised a referendum on Britain's membership in the 27-member bloc.
The backing of a majority of EU states is needed for the deal to be finalized, so Britain would not be able to block it alone. Still, one member of the European Parliament privately signaled that the deal could yet change, pointing to the "reservations" of some EU countries.
The limit on bankers' pay, set to enter EU law as part of a wider overhaul of capital rules aimed at making banks more stable, will be popular on a continent struggling to emerge from the ruins of the financial crisis.
But it represents a setback for the British government, which had long argued against such absolute limits. The City of London, with 144,000 banking staff and 700,000 people working in financial and professional services, will be hit hardest.
"The United Kingdom is not happy," one European parliament lawmaker said privately. British officials did not immediately comment.
In London's Canary Wharf, where many of the globe's biggest banks have offices, finance professionals were skeptical.
"It's anti-capitalist," said Colin Ellis, who works in the technology division of a bank. "If you have a grocer and he sells loads of fruit, he gets to keep it (the money). When a guy on a trading desk makes loads of money, he deserves to have it."
Some disagreed. "There is a huge disparity between what senior managers and junior members get and I don't see anything wrong with a cap," said Jose, a 25-year-old who works for a bank but declined to give his second name.
Ireland, which holds the rotating EU presidency and helped negotiate the deal, will now present it to EU countries. Irish Finance Minister Michael Noonan said he would ask his peers to back it at an EU ministers' meeting on March 5 in Brussels.
Other measures in the package, including moves to force banks to provide more information about the assets they own, remain unresolved.
Thursday's agreement will also require banks to outline profits and other details of their operations on a country-by-country basis, and they face a 2019 deadline to raise their core capital levels.
The change in the law is set to be introduced as part of a wider body of legislation, known as Basel III, which demands that banks set aside roughly three times more capital and build up cash buffers to cover the risk of unpaid loans.
Some experts have criticized the EU for failing to stick to all the provisions set out in the Basel III agreement, which was drawn up by regulators after the financial crash.
A ceiling on bonuses, the only one of its kind globally, is perhaps the most radical aspect of the new rules, and runs the risk of establishing an uneven global playing field that could put European banks at a disadvantage in attracting staff.
Udo Bullmann, a German member of parliament involved in the negotiations, said the deal was "revolution in a sector that didn't have rules any more".
But many think the reforms will do little to lower pay in finance, where headhunters say some annual packages in London approach 5 million pounds ($7.6 million).
An earlier attempt to limit bankers' pay with an EU law forcing financiers to defer bonus payments over up to five years merely prompted lenders to increase base salaries.
But supporters of the latest measure say it would be harder for banks to raise base pay this time around because of the higher capital standards that increase their costs and limit how much of their revenue they can pay out to staff.
Hedge funds and private equity firms will be excluded from the curbs, although they face restrictions on pay later this year under another EU law.
It could mean an end to the annual bonus frenzy in London, when newspapers are full of stories of bankers splurging on champagne, and it could affect the wider British economy.
About 27 billion pounds ($41 billion) of bonuses have been spent over the past decade on real estate in the British capital, according to data compiled for Reuters by property firm Savills.
"This could push British political opinion and opinion in the City of London several notches more hostile to the EU than it is already," said Charles Grant of the Centre for European Reform think-tank.
The restrictions planned by Brussels may nonetheless be overtaken by events in an industry where slack activity has already driven down most bonuses to twice salary or lower.
Having peaked in 2008 at 11.5 billion pounds ($17.4 billion), the bonus pool in London fell to 4.4 billion pounds last year, according to research by the Centre for Economics and Business Research. It predicts that pool will be just 1.5 billion pounds this year and fall further in the future.
On Wall Street, by contrast, the securities industry's bonus pool was expected to total $20 billion last year, with the average cash bonus rising an estimated 9 percent to almost $121,900, New York state's comptroller said this week.
A bonus cap there still looks unlikely.
"There are some in the U.S. who will think it's a good idea to do the same," said Nicolas Veron, the Peterson Institute for International Economics think tank in Washington. "But the mainstream here would say that regulating pay is going to be circumvented by the banks and will ultimately hurt the economy."
(Additional reporting by Dasha Afanasieva; Editing by Peter Graff)