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Thursday, March 21, 2013

Bankers get one last bonus season before ....

Reuters reports that this is the last season of unlimited bonuses for bankers before the EU regulations that restrict banker pay kick in.

At a minimum, we can expect bankers to make the most of it.

The article would have you believe that next year will be different and banker pay will be dramatically less.  But is there any reason to believe that bankers will not game the pay regulations like they game every other complex regulation?

So the bankers won't report large bonus numbers, is that any reason to believe that their pay will drop?

Regular readers know that your humble blogger does not object to bankers being well compensated when the banks provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

What your humble blogger objects to is yet another example of the substitution of complex rules and regulatory oversight for the combination of transparency and market discipline.  Our current financial crisis stands as testament to the simple fact that this substitution never produces the intended results and creates financial instability.

What makes the regulation of banker pay particularly galling is that banker pay is addressing a symptom and not the core problem.   The core problem is opacity.

Banker pay is as high as it is because of opacity.  Bankers are able to profit because investors do not have the information they need to properly assess the risk that the banks are taking.  As a result, investors are funding the banks too cheaply and bankers are pocketing this mis-pricing.

Bankers in Europe will have one final bonus season before they are barred from awarding themselves payouts worth more than their salary, EU lawmakers agreed on Wednesday, paving the way for the first cap of its kind globally. 
The cap is designed to address public anger at a bonus-driven culture many European politicians believe encouraged the risk-taking that led to the near-collapse of some of the region's biggest banks.....

The new rules will make it harder to award large payouts such as the bonus worth more than 17 million pounds ($25.7 million) cashed in this week by Rich Ricci, the head of Barclays' investment bank.... 
The rules, part of a wider capital regime for banks, allow bonuses of twice bankers' salary if shareholders agree. They represent the toughest bonus regime anywhere in the world. 
The cap has been softened to allow banks to pay up to a quarter of a banker's bonus in share options, bonds or other non-cash payments which attract a premium after five years. 
Payments made after more than five years would qualify for a bigger discount when calculating the size of the bonus, to make the total payment slightly more generous than foreseen by the cap....

The rules are also a setback for European banks, which had long argued that the curbs would put them at a disadvantage to U.S. rivals. 
"If you want to restrict bonuses we should do it on a global level," said Christian Clausen, president of the European Banking Federation lobby group told Reuters. 
"We have the risk that customers will do business with American banks that still pay high bonuses."

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