With an overwhelming majority, the European Parliament on July 7 2010 sent a "strong message" to European Union member states that the only option for effective financial supervision is one based on a thorough reform of the current system, with the establishment of European authorities capable of taking effective action to avert crises and avoid taxpayer bailouts, the European Parliament said in a media statement.

By adopting amendments to the legislation but deferring the final vote on the legislative resolution, the EP has given its negotiators the backing of the full European Parliament and has also left the door open for a few more weeks for an agreement to be reached at first reading with the European Council after the summer break, the statement said.

In a separate declaration, Parliament's main political groups clearly indicated that the ball is now firmly in the European Council's court to come forward with a position acceptable to all sides.

Ready to negotiate ... for a good deal

The declaration states that the European Parliament is willing to negotiate but is united in its view that the European authorities must be equipped with sufficient powers to prevent future crises and strengthen the single market. 

This gesture is a final endeavour on the part of the EP rapporteurs to help the new Belgian Presidency to move the EU member states to a more satisfactory position, the declaration adds, according to the statement.

Effective supervisory authorities …

The European Parliament voted to give a number of powers to the three European supervisory authorities (ESAs) which will be charged with controlling practices in the banking, securities and markets, and insurance sectors, respectively. 

The ESAs would be able to issue decisions directly to a financial institution such as a bank, where the national supervisor has not been able to change some of its practices that are considered unsound. 

They would also have the power to settle disputes between national supervisors and to supervise important cross-border financial institutions by acting through the national supervisors.

By their vote, MEPs also mandate the rapporteurs to push for a stability fund linked to each of the three financial sectors mentioned above so as to avoid taxpayers having to pick up the bills for future financial crises. 

They also state that ESAs should work to strengthen the European system of national deposit guarantee schemes. 

The ESAs would also be able to temporarily prohibit or restrict certain types of financial activities that could undermine the proper functioning of the financial system.

... all based in one place

To ease interaction between the ESAs, the European Parliament is calling for them to be established in Frankfurt rather than having them spread around the EU.  At the same time, it will be possible to have various representations of the ESAs in the most important financial centres of the EU.

European Systemic Risk Board (ESRB): explaining risk faster and better

The amendments adopted seek to ensure that the aim assigned by the European Commission to the ESRB - that of monitoring the build-up of risk in the EU economy - is carried out better, more clearly, and can thus be acted on faster, the European Parliament media statement said.

MEPs also want to make risk levels more easily identifiable. They say the ESRB should develop a common set of indicators to permit uniform ratings of the riskiness of specific cross-border financial institutions and make it easier to identify the types of risks embedded in them.

To improve overall risk awareness, the European Parliament is calling for the ESRB to establish colour-coded grades to reflect different risk levels. 

When the ESRB then makes warnings or recommendations on risk build-up it would use the colour-grade to indicate the level of risk. 

The European Parliament would have the power to summon the addressees of the ESRB's recommendations to explain the actions they have taken to take into account the ESRB's comments.

To enhance the ESRB's visibility and credibility, MEPs say it must be chaired by the ECB President.  Parliament also voted to widen the ESRB board membership to include academics. 

Next steps

The European Parliament's positions on all these issues were embodied in its votes on a package of reports, all of which were approved by overwhelming majorities. The texts adopted will serve as a mandate, backed by the plenary, for the EP's negotiators to continue talks with the European Council in view of reaching an agreement in the very near future, possibly just after the summer recess. 

Bankers' bonuses

Also on July 7, MEPs  approved some of the strictest rules in the world on bankers' bonuses.

Caps will be imposed on upfront cash bonuses and at least half of any bonus will have to be paid in contingent capital and shares. MEPs also toughened rules on the capital reserves that banks must hold to guard against any risks from their trading activities and from their exposure to highly complex securities.

"Two years on from the global financial crisis, these tough new rules on bonuses will transform the bonus culture and end incentives for excessive risk-taking. A high-risk and short-term bonus culture wrought havoc with the global economy and taxpayers paid the price.  Since banks have failed to reform we are now doing the job for them," MEP Arlene McCarthy (S&D, UK) said.

A different bonus culture

Upfront cash bonuses will be capped at 30 per cent of the total bonus and to 20 per cent for particularly large bonuses. 

Between 40 and 60 per cent of any bonus must be deferred for at least three years and can be recovered if investments do not perform as expected. Moreover at least 50 per cent of the total bonus would be paid as "contingent capital" (funds to be called upon first in case of bank difficulties) and shares.

Bonuses will also have to be capped as a proportion of salary. 

Each bank will have to establish limits on bonuses related to salaries, on the basis of EU wide guidelines, to help bring down the overall, disproportionate, role played by bonuses in the financial sector.

Finally, bonus-like pensions will also be covered. 

Exceptional pension payments must be held back in instruments such as contingent capital that link their final value to the overall strength of the bank. This will avoid situations, similar to those experienced recently, in which some bankers retired with substantial pensions unaffected by the crisis their bank was facing.

Tougher treatment for bailed out banks

The law will introduce special measures for bailed out banks and it will restrain the overall amounts paid in bonuses, encouraging bankers to prioritise a stronger capital base and loans to the real economy rather than their own pay and perks. 

In particular, the rules provide that no bonuses should be paid to the directors of an institution unless this is duly justified.

Capital requirements for stable banks

Two other key issues covered by the new legislation are: stricter capital rules on bank trading activities and higher standards for re-securitisations.

New capital rules for re-securitisations and the trading book will ensure banks properly cover the risks they are running on their trading activity, including for types of investments such as mortgage-backed securities that were central to the crisis. 

Studies show that the rules are expected to lead to banks having to hold three to four times more capital against their trading risk than they do at present, a European Parliament statement said.

Next steps

Following the plenary vote, the European Council will now approve the deal, possibly on July 13.  The rules on bonus provisions will then take effect in January 2011 and those on capital requirements provisions no later than December 31 2011.

Pay principles for all listed companies

Separately, in a non-legislative resolution drafted by Saïd El Khadraoui (S&D, BE), the European Parliament calls for remuneration policy principles to be extended to cover all companies listed on stock exchanges. 

It proposes that listed companies be required to explain their remuneration policies if their directors' pay is deemed not to follow certain principles aimed at removing incentives to take excessive risk or to take decisions based on short-term considerations.

The resolution also proposes that shareholders be given greater control over the directors of a listed company.

Finally, "golden parachutes" handed to directors in cases of early termination should be limited to the equivalent of two years of the fixed component of the director's pay and severance pay should be banned in cases of non-performance or early departure, says the resolution, which was adopted by 594 votes to 24 with 35 abstentions.