Pay and Bonus – Investment banking and evolving regulations

These times are very difficult times for our investment banks.

The markets are not moving and most of the time they are hostile. There is no growth in major economies and they make these dull markets. Making money in such markets is very difficult.

The regulators hold the view that the recent financial market crises were caused by the unscrupulous investment bankers who built up very risky positions and when the markets turned against they booked huge losses. .

This being so, naturally there is a huge hue and cry in the market place to curtail the actions of investment bankers. Some of the actions suggested are

–         Regulating OTC derivatives business

–         Proscribing proprietary trading

–         Ring fencing retail and commercial banking

–         Separating investment banking from main banking

In addition to these business related controls, the regulators are also seriously debating to contain and control the bonus culture in investment banking.

Our investment banks have policies to reward our investment bankers who perform very well and make more money in their trading books.

The regulators have surmised that these investment bankers built up such huge risky positions only to make more profits so that they could get awarded huge bonuses.

This week, European Union members at the ambassadorial level have debated and voted on regulations that include a provision to cap bank bonuses at two times salary. These new rules on banking are designed to protect European Union banks from future economic and financial shocks.

The new rules will be applied to all bank employees based in the European Union as well as staff of European banks based abroad.

In addition, strict transparency rules, including a proposal to make it obligatory on the banks to disclose a breakdown of their revenue and profits by jurisdiction were also introduced and agreed upon

Britain is against such rules curbing the bankers’ pay and bonus. It feels that the unique position enjoyed by London as a World’s Leading Financial Centre would be lost if these rules are implemented. It fears the financial business of London would be shifted to friendlier locations which do not impose such strict restrictions.

Despite calls from UK for concessions on bonuses, the majority of member states of European Union are in favour of introducing these news rules on pay as a way of curbing a culture of excessive risk taking.

European Union’s finance ministers will meet and debate next week on these new regulations. The Prime Minister of Britain has warned these new rules could affect the City of London’s competitiveness. Despite the British concerns, the proposals are expected to be adopted through majority voting.

Let us watch the next week’s meeting. The outcome of this crucial meeting could be

–         Britain will have the final say in modifying the pay and bonus issue

–         Other member states of EU may be more stubborn

–         There is a possibility that Britain may opt out of EU in the worst case scenario

–         To protect the Union, the EU may permit the respective member countries to evolve their regulations on bankers’ pay and bonus.

–         In such an event, the European Monetary Union may take the back seat.

Now one may agree – these times are very difficult times for our investment banks.

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