Bank Capital Requirements Directive

Bank Capital Requirements Directive.

Europe has approved huge changes to capital requirements and bank bonus caps.

Capital adequacy has long been on the agenda for financial companies with original capital rules set out in the original Basel agreements, known as Basel 1 and Basel.

All financial advisers, banks, insurance companies and pension funds are required by law to maintain a minimum level of free capital to protect from collapse or extreme market stress conditions.

Clearly, given the banking collapses over the last few years, these capital requirements were not strong enough resulting in these new set of rules, the so-called Basel 3.

New capital requirements are likely to take effect from January next year.

In addition, bankers bonuses are to be capped to a maximum of 100% of their basic salary.

These can be increased to up to 200% by shareholder majority vote.

Our view
Long overdue, although we do see a risk of a brain drain as high flying bankers may move out of London, the World’s biggest financial centre, and move out of Europe to seek higher income potential.

That said, the removal of high bonus incentives is likely to be replaced with greatershare options which should encourage bankers to make longerterm strategic decisions rather than shortterm salary gains.