Wednesday, June 16, 2010

Banking the Laws of Unintendend Consequences

"Bloomberg reports that Sharon Bowles, chairwoman of the EU's Economic and Monetary Affairs Committee, said Tuesday that banker bonuses should be capped at 50% of their salary, and the proposals to limit bonuses will face an EU Parliament vote in July.

One banker told Here Is The City: 'It just shows how far these lawmaking types are from understanding the real causes of the financial crisis and how their ill-thought-out ideas will work in practice. I think everyone understands the need to align compensation with long term performance, but limiting bonuses to a percentage of base pay will only see salaries increase again - and in some cases they will go up substantially. This is a classic case of the Law of Unintended Consequences - bankers will receive so much of their compensation in fixed pay, that they will have no incentive to perform and no incentive to limit their risk-taking either, as their own downside will be protected'.

And Ms Bowles' reaction to complaints from bankers about the bonus restriction suggestions ? - 'If bankers and traders want to leave and go to other jurisdictions.....I say good riddance'. But Ms Bowles, they won't be shipping out - they will be forming a queue to get in to the EU zone. 'Frankly', another senior trader told us, 'I like this idea. We all know that huge bonuses are a thing of the past (at least for a while), so the thought of a base salary of a few million is really quite appealing. You have to love those daft brushes over at the EU!'. "

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