(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 national regulators.
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 to 1,138.
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.
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- 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 investment banks.
- 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 bankers [ID:nL6N0DY2N9]
- For previous columns by the author, Reuters customers can click on [ELLIOTT/]
(Editing by Edward Hadas and Sarah Bailey)
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