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Friday, 8 October 2010

More boutiques than Bond Street?

Interesting to see that the EU is getting the hang of the US extra-territorial regulation and is trying the same game on bankers' bonuses.  According to the BBC, the new bonus rules would apply to the worldwide operations of banks and subsidiaries operating within the EU.

Key points of the proposals include:

  • Cash element of standard bonus capped at 30%, and one-fifth for large bonuses;
  • New watchdog for European banks to define what is a big bonus;
  • 40% of normal bonuses deferred or paid over several years, while 60% of big bonuses postponed;
  • A clawback mechanism, meaning a star banker might not receive the full payout if investments unravel.

I like the idea of a 'malus', a reverse bonus that is due if the previously profitable trade goes wrong, but how do you enforce this when the bonus recipient may have moved to the other side of the world.  And how does the EU expect to force Yankee Bank Investments Ltd, the UK incorporated to react if its former employees are paid big bonuses when they move back home or elsewhere in the organisation.  If the EU goes against the London operation they will quite rightly have a case to take to the ECHR.

I reckon that over time this is likely to lead to the return of the merchant bank - little or no capital, but big fees for advisory work, mergers and acquisitions.  Why would a corporate finance advisor who has worked all the hours of daylight and more for months to earn a big fat fee for his firm, and at no continuing risk once the deal goes through, want to see his/her bonus tied up in shares where the value can be wiped out by one stupid trader?   All that goes away by working for an institution that is not a licensed deposit taker.

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