Guillaume Prache, 4 April 2013
The ECOFIN Council meeting held on 5 March 2013 widely endorsed the proposed bonuses cap provisions as contained in the upcoming Capital Requirements Directive (CRD IV).
To cap bank bonuses at salaries level as the EU institutions decided does not address the real issue around the outrageous remuneration of many EU bankers: these bonuses have been and are still largely (and unwillingly) funded by tax payers, clients and non-insider shareholders who have been losing billions on their bank equity investments since 2008 when many bankers simply accepted their enormous bonuses and too often continue to enjoy huge amounts unrelated to the benefits they bring to the EU real economy and to their non-insider shareholders.
The fundamental issue here is to ensure that taxpayers, clients and non-insider holders do not continue to fund these bonuses at their own expense. There are two main reforms needed to achieve this:
1. The first one is to prevent banks from accessing central banks’ ultra-cheap funding for any other purpose other than collecting deposits and lending to the real economy, and to prevent taxpayers to have to rescue the so-called “too big to fail banks (“SIFIs” in the EU jargon): a real separation of commercial banking from other businesses would kill these two birds with one stone by ending the subsidization of investment banking and capital market activities by central banks, and by downsizing the biggest EU banks by about two thirds on average in terms of balance sheets. The Bank Recovery and Resolution scheme –currently in discussion at the European Parliament- would contribute to these objectives; but is however insufficient to prevent repeating the current financial crisis in the future.
2. Opponents to a Glass-Steagall[1]- like approach to EU banking structure reforms would argue that this would not have prevented the Spanish property lending crisis. EuroFinUse proposed then to impose caps on Loan to Value and Loan to Income ratios[2] (i.e. forced responsible lending). The Liikanen Group retained this proposal in its recommendations from last October[3].
3. Also, the governance of financial institutions must be thoroughly improved, in particular by better ensuring that long-term and engaged shareholders have the final say on bankers’ pay, not the management.
Capping mandatorily bonuses at salaries level for EU banks itself will not solve any of these problems and will favor non-EU competitors to EU banks, which may well in turn aggravate the instability of “SIFIs”; not mentioning the further negative impact on shareholder value (EU bank shares weigh heavily in EU pension funds assets). Also, banking is not -by far- the only business sector enjoying bonuses that are larger than salaries. Why would it be automatically bad for bankers and not for other executives? Isn’t such a measure more like a political move aimed at captivating citizens before the 2014 EU elections with little rationale behind?
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[1] The Glass-Seagall Act forbid US commercial banks to diversify into investment banking. Its repeal in 1999 is one President Clinton’s biggest mistakes, by his own reckoning.
[2] Liikanen Group Consultation
[3] http://ec.europa.eu/internal_market/bank/docs/high-level_expert_group/report_en.pdf