March 6, 2013

What the EU Bank Bonus Plan Really Accomplishes

Europe Union Agrees on Plan to Limit Bankers' Bonuses ... The move, part of a package of banking regulations known as Basel III that is aimed at reducing the danger of big bank failures, was hailed Thursday by some European lawmakers. 'We've achieved the most comprehensive banking reform in the European Union,' said Othmar Karas, an Austrian member of the European Parliament who helped find a compromise in a late-night negotiating session with representative from E.U. member states and the European Commission. A majority of the Union's 27 member nations would need to approve the rules for them to take effect. – The New York Times

Dominant Social Theme: Let's make sure bankers don't profit at our expense.

Free-Market Analysis: At this point in the business cycle it's pretty amazing that those running the EU believe that controlling bank bonuses by regulatory fiat is going to do anything to ameliorate the EU's larger problems.

The issue, of course, is not out-of-control banks or bankers but an out of control credit situation that has resulted in a slow unraveling of the euro and perhaps of the EU itself. Instead of dealing with the fundamental problem of the EU, which is the ability of member states to flexibly recapitalize, Eurocrats have spent precious time and regulatory capital focusing on industry compensation issues.
The idea is that banks and bankers are incentivized to take too much risk – and that is one of the reasons for the state that Europe is in. But this doesn't make sense given that past leaders of the EU are on record as stating that they hoped for a financial crisis to drive a more powerful political union.
Given the deeper currents that are flowing around this issue, Euroleaders may have reconsidered what their predecessors wished for. The situation is increasingly intractable – or so it seems to be – and it's hard not to look at bank bonus regulations as something of a public relations gambit meant to appeal to disgruntled EU citizens who are suffering under various austerity programs. Here's more from the article:

The agreement on the proposed banking rules reflects the global backlash against the lavish compensation in the financial sector that many politicians say rewarded risky trading and investments that triggered the financial crisis. ... The limits on bonuses would also apply to bankers employed by E.U. banks but working outside the bloc, in New York, for example. The E.U. authorities are drafting separate rules that could restrict remuneration at private equity firms and hedge funds.
... The law is intended to reduce the financial incentives that led bankers to take risky bets, like those made on subprime housing debt in the United States during the credit bubble. But some critics of the legislation have warned that institutions might defeat the intent of the legislation by simply raising bankers' base pay.

Mark Boleat, the policy chairman at the City of London Corp., which is the voice of London's financial center, said Thursday that 'removing flexibility from pay arrangements in this highly cyclical industry would seem counterintuitive, especially if it leads to higher fixed salaries.'
Some bankers said the rule posed the question of why the bonus cap would not apply to other industries where staff members stand to gain large bonuses. Stephen Hester, the chief executive of Royal Bank of Scotland, told BBC radio on Thursday morning that he did not think 'bankers should be treated as special creatures in any way.'

This is certainly a true remark. Bankers make a lot of money because the Western economic system has organized currencies around central banking – and commercial banks act as the distribution arm for these banks. Remove monopoly central banking and you will reduce and perhaps eliminate the gigantic capital flows that create bank bonuses to begin with.

There is a good deal of pressure on the central banking system these days but not enough – so far – to motivate any major changes. Instead, those behind the current system continue to try to redefine its weaknesses by pointing the proverbial finger elsewhere.

What is ironic is that this exercise in blame-passing is not going to achieve its intended purpose. The problems with the EU and the euro are fundamental and have to do with the structure of the euro currency and lack of flexibility that Southern European countries now face. Couple this with IMF-style austerity and you have a recipe for social unrest. And that has, in fact, been the result.

The latest gambit is for the ECB to inflate aggressively – and ironically, this will only make the banking sector increasingly flush, leading to higher salaries and other kinds of perks that Eurocrats want to do away with. Again, it is the system itself that is skewed toward enriching Europe's big banks and bonus issues have little impact on larger capital flows or their eventual direction and redirection.

By continuing to concentrate on these tangential issues, the EU is doing itself no favors. Officials look distinctly unserious and the larger problems that the EU legitimately faces go unattended.
In fact, the whole exercise of restricting bonuses tells us that the deeper structural issues faced by the EU and the euro are not going to be grappled with any serious way. The solutions that have been taken so far involve the deliberate and increasing debasing of the euro itself.

This may eventually reduce some of the civil unrest in the Southern PIGS but it will stir up the Germans who sit at the heart of the European economic engine and regard inflationary policies with a kind of ingrained horror.

Conclusion: It may be – as more and more believe – that the situation itself is intractable and even unsolvable. But by wasting time catering to social resentments rather than attempting to grapple with systematic flaws, the powers-that-be are indicating a lack of seriousness that will be doubtless be noted by the larger financial community.

Source

No comments:

Post a Comment

Post a Comment