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Expert comment on new European Banking Authority crackdown on bankers’ bonuses Print E-mail
Wednesday, 15 October 2014

Professor John Thanassoulis, Warwick Business School Professor of Financial Economics, who researches executive pay and banking, comments on the new European Banking Authority crackdown on bankers’ bonuses.

Professor Thanassoulis said: “Today the European Banking Authority has declared that almost all ‘role-based remuneration’ is essentially bonuses. This is common sense in situations where the remuneration had all the features of a bonus, except that it was paid out in 12 monthly instalments over the course of a year. This ruling means that banks cannot use this thin veil to escape from the bonus caps which European legislators have agreed.

“This ruling does not say that the bonus caps are without problems, nor does it say they cannot be improved.

“The problem of the bonus cap is that banks need to pay at market levels to keep the bankers they need. By capping bonuses, and having the EBA enforce that cap, banks will be forced to actually raise fixed pay. This fixed pay, when multiplied across a large part of their workforce, will represent a crippling bill for banks in times of stress. In short, this cap makes banks riskier as it pushes up their fixed costs.

“The bonus cap itself will not lower overall bank risk as this is set at the whole bank level to marry up the risk and returns the CEO thinks he or she needs to deliver to the debt markets.

“Research I have conducted shows that with a slight adjustment the cap legislation could be much more effective in delivering safer banks and lower pay. The cap on the bonus should be applied at the aggregate bank level. If total bonus payments had to be less than a given proportion of total earnings then the European Union would win and see lower pay levels; and banks would win as they would be safer, while being able to retain the key people they think they need.”  

 

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