Something fundamental seems to have changed in Europe in recent days. After the European Union introduced a cap on bonuses, the Swiss people voted in favour of an even harder clampdown on telephone number extra payments. Taken together with a move by many European countries towards a financial transaction tax, it for the first time looks like there are some serious measures being implemented to reign in the rent-seeking behaviour of the financial sector.
The complaint by some trying to protect the broken culture of the City of London that the capping of bonuses to 100% of base salary (200% if shareholders vote for it) is ‘destabilising banks’ is just pathetic. How can any economically competitive entity survive without bonuses worth a multiple of base salary? This is a question the City seems unable to answer. The reality is of course just the reverse.
Read this gem published in the Independent in March 1997 (yes, that was just before Tony Blair was elected as British Prime Minister and Helmut Kohl was still the Chancellor of Germany):
The Bank of England is growing increasingly concerned about the potentially destabilising effect of the City’s highest earning stars on the financial institutions that employ them.
Even before last Friday’s announcement of a pounds 50m hole in NatWest Markets’ options trading book, the Bank had become especially worried about the role big bonuses play in the risks traders are prepared to take with their employers’ capital.
The publication by the Bank today of a report on “Remuneration and Risk” coincides with speculation that Kyriacous Papouis, the junior trader understood to be responsible for NatWest’s catastrophic derivatives pricing error, is to be suspended by his current employer Bear Stearns, pending the completion of NatWest’s internal inquiry into the affair. Mr Papouis left NatWest last December for the American bank, which yesterday refused to comment.
NatWest became part of the Royal Bank of Scotland (RBS) in 2000. And we all now what happened to RBS and Bear Stearns in the financial crisis a bit more than a decade later! It has taken a long time but finally there are some measures with teeth designed to change this bonus-induced culture of risk taking. The mood in Europe has changed.
Wolfgang Münchau summed up nicely the shifting political ground:
The general attitude in Germany, and many other parts of the eurozone, is that the banks should essentially be kept on a very short leash since they received large bailouts during the crisis. There is now an overwhelming political will to tax the industry, and to clamp down on the rent-seeking behaviour of individuals. I personally believe this is a defensible proposition.
Attitudes on the continent towards the banks have become much more extreme, even hostile. And if individual institutions retaliate, and warn that their best people will leave, it might turn out that people come to regard this not as a threat but as a promise.
There are many areas in Europe where we need a shift of attitudes (think austerity). But what is currently happening with bonus payments is an encouraging sign. We might just be at the beginning of a process of reasserting political (democratic) control over the largely detached finical sector. And this is surely a good thing.