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Thursday, February 28, 2013

EU tightens the noose on bank bonuses

As we noted in today’s press summary, a tentative EU deal was struck last night on bank bonus curbs, as part of the broader agreement on CRD IV (which implements Basel III). We’ve discussed this in detail before, so we refer you to that post for the background.

The deal looks much as expected, although a couple of changes have been added:
  • Bonuses should be limited at a 1:1 ratio to salary, which can rise to 2:1 with explicit shareholder approval.
  • Up to a quarter of variable pay can be discounted and issued in instruments deferred for more than five years, which could increase the ratio above 2:1.
  • Bonuses in the form of long term equity or debt that can be bailed in if a bank fails will also be given more favourable treatment.
Surprisingly, the deal still includes plans to force subsidiaries of foreign banks in the EU to adhere to the bonus rules and, more importantly, forcing all subsidiaries of EU banks in the rest of the world to do so. This could hamper competitiveness and, we suspect, may still be subject to changes. This is also an area where the UK might have expected to receive a concession.

What happens now then? EU finance ministers meet next week and will discuss the proposals. Significant changes seem unlikely, which could mark a loss for the UK, which has vehemently opposed the rules from the start.

The real question for the UK is whether it should try to force a formal vote on the issue at the meeting of finance ministers. This would raise the prospect of voting down the UK on a financial services issue – that this has never happened before is often cited by the EU as a counterargument against UK concerns over EU financial regulation. If the UK is outvoted it would mark a potentially significant precedent for the UK's future relations with the EU.

It should be remembered though that this is only a small part of the large CRD IV package, which has been continuously delayed due to MEPs' demands for bank bonuses to be included. The UK has managed to secure favourable treatment on the key aspect of the legislation – the ability to adjust national capital requirements for banks.

As we have suggested before, the debate on bank bonuses seems slightly tangential in terms of the wider debate over bank capital and broader financial stability (indeed there are valid question about why it has been lumped in with CRD IV at all). For all the talk of needing bank bonuses to limit risk taking and moral hazard in banks, the EU has supported and approved €1.6 trillion in state aid to banks over the course of the financial crisis. Many countries have pushed for limits to capital requirements and supported the easing of the Basel III liquidity controls. The EU, and the eurozone in particular, has also consistently argued for and supported bank bailouts and refused to countenance imposing losses on bank creditors, instead shifting the burden to taxpayers.

Trying to limit moral hazard by tackling excessive bank bonuses is all well and good, but it is a drop in the ocean when it remains clear that states and central banks will continue to bailout banks at any cost.


Kernow Castellan said...

The EP has a total misunderstanding of bank compensation.

For well paid bankers in the UK, only about 20% of total compensation is in immediate cash, the rest being deferred cash or shares, which can be "clawed back" later if needed.

This directive will require that at least 50% of compensation is in the form of salary - and thus in cash, and committed (cannot claw back).

I am not sure they really understand what they have done.

Jesper said...

Link to a recent speech by Draghi:

There is this quote:
"This is because the crisis has severely fragmented the euro area’s financial system. It has disrupted the way our interest rate changes are passed on by banks to the wider economy. As a result, our low interest rates have simply not been getting through to people in some parts of the euro area."

Reading the above might make someone assume that steps are being taken to improve the monetary transmission mechanism - reform of the banking sector.

The speech mentions reform. However, the banking sector does not appear to be subject to much reform. This blogpost highlights some problems:

The EP complains about being micromanaged on the MFF and that the big picture is being lost. Then we see what the EP does: micromanages bonuses for bankers but losing sight of the bigger picture: The necessary reform of the financial sector.

The EP does not show leadership and therefore it should not have any position where leadership is required. Erase it from the treaties and disband it.

Rik said...

The Draghi quote is simply the ECB trying to give a legal foundation to possible bondbuying. Bondbuying makes transmission easier, according to the ECB.
He presented it Q3 2012 without any proper research that it would work and the earlier reasearch that there was indicated that it wouldnot work.
So does present experience rates are much lower now but transmission is still not working (even partly in the North).

Simply has nothing to do with transmission it is simply trying to give a legal basis for a bondbuying programm.

As this shows that the major problem lack of/incompetent riskmanagement is simply not adressed. Plus the second and third biggest problem resp insufficient capital and the combination of activities.
This is purely political.

Strange that your Dave has apparently agreed with this. It makes worldwide operating of banks with HQs in the EU very difficult. An 'optimal' structure would be HQ out of the EU (and UK), trading activities as well for the largest part. Probably as well all non-EU subs not longer under something EU/UK bankish.

Golden rule is you need legislators that are more clever than the other side to make these things work. Which is clearly not the case. Likley there will be a lot of holes in it.

jon livesey said...

When about 75% of Europe's finance industry is in London, I can't really imagine the EU worrying very much about how regulations would harm competitiveness.

I'd guess that the attractions of imposing their will on the UK would far outweigh any potential economic damage they could be doing.

Average Englishman said...

This bit of bonus and banker bashing that is all very logical when looked at from Brussels because:
* It shows Dave that if you give us a hard time we'll give you and your economy a hard time.
* It plays well with the broad mass of EU citizens who are jealous of bankers' wealth and do not really understand what they do anyway.
* It makes it look as though the EU is doing something about nasty old bankers, who EU politicians have blamed for their own financial failings.
* It helps direct the blame for the Euro crisis towards the banks and away from the politicians who really caused it.
* It appears to cost the EU nothing apart from those in the Uk and who cares about that because they're already semi-detached Europeans anyway?

It's another nonsense dreamed up by overpaid incompetents who like to think they are in control and international banks will simply get round it. I rather liked the joke comment in the Telegraph this morning from their cartoonist, Matt: Bank boss to employee - "We can't give you a huge bonus but the bank would like to buy your tie for £3m".

To end on a more positive note, this EU policy should at least achieve some more converts and funds for the UK Independence Party.

Jesper said...

I'd expect Sweden to not oppose the measure. I'm not a fan of double negations but it is accurate on this issue (as it has been done for other issues). Not opposing does not mean support.

If I'd be a UK politician then I'd be extremely careful in counting on support from the current Swedish political leadership. They are good at giving moral support but reluctant to provide actual support. Actual support could at times be the difference between winning and losing but the current leadership appear to prefer losing by not doing anything rather than trying to win but risk being seen fighting and losing.

Opposing the measure would also create an opportunity for the opposition to accuse the government of being pro-bankers.

It has been claimed that the measure will not concern many in Sweden. My guess is that the Swedes that might be affected have moved away from Sweden to work in other financial centers. If that is true, then one might wonder if it is Sweden's loss or gain to not have bankers with such 'skill' plying their trade in Sweden ;-)

The measure will not increase stability, it will allow politicians to be seen to be doing something. That will give them some cover when they avoid dealing with the real issue - introducing malus and breaking up banks that are too big.

EPs are trying to be populist but are so out of touch with the electorate that they can't even be populist.

christina speight said...

All the sweet talk of "the UK has a point" falls away at the first hurdle. This is diametrically opposed to British policy and they might have known that we would oppose it. It can only mean that they want us to get out altogether.

If we had the guts we would hand in our Art:50 notice NOW

Anonymous said...

I increasingly hear from friends 'in the know' within Europe, that France is behind these constant EU acts of friction with the UK. I am told that they are now doing underhand things that even hurt themselves in the process.

If true, which I think it is, then this shows Europe for what it is and the French for what they are. The French disappoint me the most and need to be held to account for abusing the mechanisms of the EU.

We have to exit this truly troubling organisation that is going to be the cause of the next flashpoint.

Gosporttory said...

Fully agree with Christina Speight.