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Bankers, Bonuses & Blunt Instruments

14th Jan 2014 | Bankers trying to dodge measures to restrict their bonus payments should take a long hard look at themselves

The European Commission is in the process of considering new rules proposed by the European Banking Association (EBA) aimed at the cap on banker’s bonuses.

If the EBA rules are accepted all institutions that are subject to the Capital Requirement Directive (CRD) will have to comply.


CRD IV is the regulation at the heart of the UK government’s current legal action on behalf of the industry to prevent imposition of a 100% cap on banker’s bonuses.

The vexed question of which executives feel the pinch is becoming a game of cat and mouse between the regulators and the banks on executive pay restraint.

The EBA rules are an attempt to control who gets caught by the bonus cap and who does not. The fact that the proposed new criteria will be both qualitative and quantitative makes it possible that financial institutions will seek to exclude staff that they wish to pay more than the CRD maximum.


To protect against exclusions the EBA regulatory hurdles get tougher as the total remuneration of the staff being excluded gets larger. At the EU 500,000 level (the rule doesn’t apply below this level) institutions only need to notify exclusions to the competent authority. The strictest regulation applies to those with total remuneration of EU 1m. For these exclusions EBA approval is required. The definition of total remuneration will therefore be critical to how exclusions operate.

Goldman Sachs and Barclays are both reported to be introducing “allowances” for staff in particular roles in place of bonus. It seems likely that these so-called allowances will push the total remuneration of some staff over the EBA threshold, however, because the bonus money has already been paid by another means the overall effect is to avoid the restraint. Also critical to the way exclusions operate is the definition of which roles are affected. The CRD requires that all staff having a material impact on the risk profile of an institution be identified. Even allowing for financial institutions downplaying the number of roles linked to the risk profile there can be no argument about some of the roles. Or can there?


The same emphasis on roles was at the heart of attempts by US regulators to stop the kind of risky proprietary trading that resulted in huge losses for US financial institutions during the banking crisis. The Volker rule enacted in 2010 was aimed at proprietary trading desks, however many of the traders simply switched desks and continued to trade using the institutions capital on client-centered trading desks.


The issue of banker’s bonus payments has remained in the spotlight in the UK.


Newly appointed RBS CEO Ross McEwen, who is paid a basic salary of £1 million, was given 454,106 RBS shares when he joined the bank in 2012.

This was compensation for missing out on his bonuses at the Commonwealth Bank of Australia, due to his decision to join RBS as its head of UK retail. The disclosure was only made after markets had closed for the New Year break fuelling suspicion that for the loss making bank now in public ownership, transparency is all about timing.


The UK Government now holds 81% of RBS shares and is being heavily lobbied by RBS to invoke the EU Clause that allows bonuses up to 200%, provided they are approved at the forthcoming AGM. Without this approval any bonuses would be capped back at a 100% of salary. Last years bonus pool was £600M. This years pool is said to be smaller but still in the hundreds of millions. Labour leader Ed Milliband has called on the government as majority shareholder to block the 200% proposal. Ex-banker and Bank of England Governor Mark Carney also weighed in, characterising bonus caps as a ‘blunt instrument.’


No ambiguity there then.


In the just released World Economic Forum Global Risks Survey 2013, the risk that respondents rated most likely to manifest over the next 10 years was ‘severe income disparity’, while the risk rated as having the highest impact if it were to manifest itself was ‘major systemic financial failure.’


Let’s hope that bankers made a note of this and consider applying themselves vigorously to restraint and improved financial governance, lest some more blunt instruments are turned upon them.

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