(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Dominic Elliott
LONDON, May 17 (Reuters Breakingviews) - Widening the
European Union bonus cap to include almost all the region's
bankers could end up throttling a recovery. A new proposal from
the European Banking Authority (EBA) suggests changing the
definition of "material risk taker" to include any banker whose
total remuneration comes to more than 500,000 euros. Before, the
definition looked likely to rely on the interpretation of
On the face of it, the EBA's enlarged definition levels the
playing field. Take Deutsche Bank (DBKGn.DE) and Barclays
(BARC.L). Although their business models are similar, last year
Barclays had just 393 risk takers under the old definition,
versus 1,215 at Deutsche. Under the EBA's new proposal, the
number of bankers affected at the UK institution would increase
It's unlikely that the new bonus cap will lead many more
employees to jump ship to Wall Street competitors which are not
restricted. Most of the additional people captured by the new
rule will not have earned so much that the cap will cut deeply
into their pay.
Yet the EBA's ruse would still put managers of European
banks in a bind. Investment banking is an inherently cyclical
business which requires a degree of flexibility over costs.
Large variable bonuses can be the best way to deal with the
see-saw effect, and the lumpiness of revenue from originating
capital markets business and takeover deals.
Most bank bosses would agree that pay got out of hand during
the crisis. But they also point out that the market has already
started to self-correct. Banks have brought in provisions to
claw back bonuses several years down the line. That should
prevent employees from taking risks without any downside, as
they did in the run-up to the crisis.
Of course, without an all-encompassing bonus cap there is
danger that compensation could spiral out of control once more.
But banks are still too big and too fragile. A wider bonus net
will only make them more so.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- The European Banking Authority has approved draft
regulation that would widen the scope of the European Union's
proposed cap on bonuses to include any banker whose total
remuneration is greater than 500,000 euros, financial services
firm PwC said in a statement on May 17. PwC added that as many
as 10 times the number of staff could be affected at some
- Previously, there was no common definition of who had to
comply with the remuneration curbs passed by the European
parliament, although most bankers and compensation consultants
assumed it would apply to so-called "material risk takers".
- Reuters: EU bonus cap could hit 10 times as many London
- For previous columns by the author, Reuters customers can
click on [ELLIOTT/]
(Editing by Edward Hadas and Sarah Bailey)
Keywords: BREAKINGVIEWS BONUS CAPS/
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