EU attempts to cap banker bonuses at 2x salary

Bloomberg reports that EU lawmakers and regulators have tentatively agreed to cap banker bonuses at 2x salary.

I appreciate that they are taking this step in an effort to reduce risk taking by banks.  Unfortunately, I am not sure the cap is going to achieve this goal.

Everyone knows that bankers are immensely creative in how they structure financial agreements.  So it would not be surprising to find that bankers find a way around the cap.

Regular readers know I prefer a much more direct approach to reducing risk on and off the bank balance sheets.  This is accomplished by requiring the banks to provide ultra transparency and disclose on an ongoing basis their current asset, liability and off-balance sheet exposure details.

With access to this information, market participants, including the regulators, can exert discipline to restrain risk taking and the high levels of compensation that came from taking high levels of risk.

European Union officials reached a tentative deal with lawmakers to ban banker bonuses that are more than double annual salaries. 

Negotiators from the European Parliament and Cyprus, which holds the rotating presidency of the EU, brokered the draft agreement during a meeting today, said Sharon Bowles, chairwoman of the assembly’s economic and monetary affairs committee. The deal is contingent on compromises being reached on some other parts of an EU law on bank capital. 

The accord would cap a banker’s bonus at the same level as fixed salary, while giving room for larger awards with shareholder approval, Bowles said in an e-mail after the meeting in Strasbourg, France. A maximum limit would be set forbidding awards of more than twice fixed pay. 

“We are really almost there” in getting a deal on the entire bank capital law, Philippe Lamberts, the lawmaker leading the talks for the parliament’s Green group said in a telephone interview. “The intention is to really conclude next week.” 

Banks are facing a backlash from EU lawmakers determined to cut variable pay as part of a quest to reshape lenders as utilities rather than money-making machines. Public outrage and shareholder rebellions have led some banks to limit payouts.