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Categorized | Banks

Banks fear damage from EU bonus cap

Posted on February 28, 2013

Leading bankers and investors have warned that an EU bonus cap for banks poses a competitive threat to Europe’s finance industry.

Executives at large European banks said they were at risk of losing key traders and managers to US and other international rivals after the EU provisionally agreed on a 1:1 bonus-to-salary ratio. With shareholder approval, the ratio can rise to 2:1 in what pay experts called the harshest curb on private sector pay globally.

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    “This will seriously harm European competitiveness and have a negative impact on the real economy,” said Simon Lewis, chief executive at the Association for Financial Markets in Europe, a trade body for investment banks.

    The regulatory affairs head at one bank said the curbs had left him “speechless”. “This is big stuff,” he added. “This wrecks the model of keeping salaries low.” Another executive said: “People want to move already.”

    Senior European bank executives have spent the past few weeks trying to persuade EU governments to change the proposal so that it would only apply to banks’ European operations. As drafted, Deutsche Bank staff will be subject to the ratio no matter where they work. The same curb, however, will only apply to Morgan Stanley’s Europe-based bankers.

    Wall Street banks, while also opposed to the cap, are already assessing the benefits of a wider shake-up imposed on their competitors. “It’s going to hurt all of the Swiss and German banks from doing businesses in the US and it’s going to make us all distort compensation in Europe, which won’t be that bad because it’s not a majority of our employees,” said a senior US bank executive.

    In London, Chancellor George Osborne was scrambling to launch a rearguard action against any cap, as senior bankers warned that any proposed legislation threatened London’s competitiveness as a financial centre.

    The proposal triggered anxiety that non-European banks would move their UK-based operations elsewhere. Senior Treasury officials made urgent inquiries around the City’s top institutions as they assessed the fallout from the curbs.

    Britain will have a chance to overturn what it views as the most damaging parts of the curbs at a meeting of finance ministers on March 5. But a clear majority of EU states – including Germany – supports the provisional deal as the best available given the urgency of the need to implement the EU’s capital rules.

    One priority for the UK will be preventing the bonus rules from applying to bankers working outside Europe for London-based banks, such as HSBC or Standard Chartered.

    “We have major international banks that are based in the UK but have branches and activities all over the world, and we need to make sure that regulation put in place in Brussels is flexible enough to allow those banks to continue competing and succeeding while being located in the UK,” David Cameron, prime minister, said.

    London mayor Boris Johnson called the bonus cap “possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire”.

    Additional reporting by Tom Braithwaite in New York and David Oakley and George Parker in London