EU Proposals - Bad Idea?

It is thought that the European parliament and EU states could reach an agreement on Wednesday whether or not to go ahead with the planned caps on banking bonuses as negotiations are due to be resumed.

As I talked about in my previous post, Britain is very anxious over these new plans which may trouble the city of London, the world’s financial capital. The UK is in favour of discouraging upfront cash bonuses that exceed salaries. It wants bonuses to be issued in the form of equity or bonds meaning that bankers will have a greater interest in the long term performance of their banks and will adjust their risk policies accordingly. At the minute, clawback provisions allow banks to retrieve bonuses from bankers who played a part in the failure of the bank The EU changes that bonuses may equal but not exceed salaries are very restrictive. The obvious way around this would be simply to give bankers a huge pay rise. Banker’s remuneration packages would be the same as before however it would be harder to clawback remuneration when things have gone wrong.

Andrew Bailey, the UK’s chief banking supervisor, believes this will harm the banks’ ability to build up capital. At a recent conference Bailey said he was “skeptical and concerned” about the plan to limit bonuses, because it would “make the cost base inflexible and make it more difficult to retain earnings and build capital.”

Having reached it's peak of £11.6 billion in 2007/2008, the bonus pool in London is set to fall to £2.3 billion is 2012/2013 according to the Centre for Economics and Business Research. The healthier climate for banking in the United States and Asia combined with the new bonus cap could be enough to encourage bankers to move abroad and this would come as a problem for many City firms.  

However it doesn’t seem likely that Britain is going to win this argument. "A cap is the only way we will see bonus restraint," said Arlene McCarthy, the British member of the European Parliament who pushed for pay reform. "The parliament is not prepared to budge. Legislators have got fed up because they don't see any restraint in the bonus culture."

I guess all will soon be revealed….