Counterparties: European bonus season just got a lot more boring
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For the financial sector, London, and the rest of Europe, just got a little less swinging. As a part of Basel III, the European Union is moving ahead with new rules that will limit bonuses to one yearâ€™s salary, or two yearsâ€™ salary with shareholder approval. The rule will apply to employees at EU-based banks, regardless of where theyâ€™re located. Itâ€™ll apply to employees of foreign banks working in the EU, too.
London Mayor Boris Johnson isnâ€™t happy: â€śBrussels cannot control the global market for banking talentâ€ť. He thinks the move is â€śpossibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman empireâ€ť. Europeâ€™s bankers are also predictably unhappy. The WSJ quotes a bank executive who thinks the rules are â€ścrazyâ€ť and a â€śdisasterâ€ť.
The hyperventilators should probably take a deep breath. Base salaries will likely rise in response to the rules. Or, why not just do what John Carney and Lex suggest, and â€śincrease the salary to the anticipated bonus, hold it in escrow until year’s end, and then subject it to a clawback for underperformanceâ€ť.
Masa Serdarevic thinks the rule will affect star traders of the world, and particularly, where theyâ€™ll want to live. â€śWorking in Zurich for UBS, say, suddenly becomes a whole lot more attractive than any bank in London.â€ť She also says that big bonuses can serve a useful purpose:
Itâ€™s also worth thinking about why banks pay bonuses in the first place. Itâ€™s mainly because they want their staff costs to have a relatively small fixed component (base salaries) and a larger variable component (bonuses), meaning they can reward and retain individuals at their discretion. Itâ€™s sensible budgeting, not something they do because they like to throw money at their employees.
For now, thereâ€™s little for bankers to fret about: the regulations face numerous layers of scrutiny and likely revision before they take effect in January 2014. As the Epicurean Dealmaker tweeted, the sure-fire winners in this situation are compensation consultants, who have at least a year to figure the best way around the new rules. In fact, the FT reports that theyâ€™re already working on it. — Ben Walsh
On to todayâ€™s links:
The Supreme Court wants the SEC to work a little faster – Dealbook
For approximately the 87th time, the Volcker Rule is being delayed -Â WSJ
Occupy the SEC is suing the Fed, SEC, CFTC, OCC, FDIC and Treasury over Volcker delays -Â Occupy the SEC