By Huw Jones
LONDON (Reuters) - Bankers could see part of their bonus wiped out if their employer's capital position falls below certain levels, according to a proposal from the European Union's banking regulator aimed at protecting taxpayers.
The EU has approved a law to cap bonuses from 2014 at no more than an employee's fixed salary, although the world's toughest curb on awards to senior bankers also allows a bonus of up to twice salary if shareholders approve.
The aim is to clamp down on excessive risk taking seen in the run up to the 2008/09 financial crisis to win big bonuses.
Under existing EU rules up to half of a bonus can be paid in cash, with the rest in shares that the employee can cash in over several years.
The new law allows other instruments like bonds to be used for the deferred portion and on Monday the European Banking Authority (EBA) proposed conditions for their use, such as when they must be written down if a bank gets into trouble.
"Instruments should provide incentives for staff to act in the long-term interest of the institution," the EBA said.
If bonds known as contingent capital or CoCos, a form of hybrid debt, are used they must be written down if a bank's total tier one capital falls below 8.5 percent of risk-weighted assets, it said.
Lower quality bonds would have an even higher wipe-out "trigger" of around 10.5 percent to help bring a bank's capital level back up to minimum levels and shield taxpayers from having to bailout out lenders, as occurred in the financial crisis.
The watchdog is also examining whether just one universal trigger - when a bank's core, top quality capital falls below the 7 percent minimum - would be simpler.
The bulk of an instrument used in a bonus must be issued on the open market to other investors as well, to make sure it is priced in a transparent way to stop banks trying to get round the rule, the EBA said.
If an instrument is issued solely for paying bonuses, then it will have to comply with further conditions such as a cap on dividends or interest it can pay out to the holders.
The EBA said additional costs to banks from the conditions it has proposed would be very limited.
After a public consultation started on Monday, the EBA will publish final rules in 2014 that will be binding on all the bloc's 28 member countries. The cap applies to bankers whose basic salary is over 500,000 euros ($663,200), most of whom are in London.
($1 = 0.7539 euros)
(Reporting by Huw Jones; Editing by Mark Potter)