The nasty parts of the EU's new bonus rules, and their probable effects

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Just as the FSA's consultation document on the UK compensation code is about to be closed pending the release of a policy statement next month, the Committee of European Banking Supervisors (CEBS) has stolen its thunder.

Last night, CEBs issued a set of draft guidelines on bonuses. Subject to finalisations, they are likely to come into effect on Jan 1st 2011. Much of what they say has been said already. Some of it has not.

The familiar stuff reiterates that guarantees are to be virtually outlawed (only one year, only in exceptional circumstances), that cash bonuses WILL be limited to 20-30% (the FSA had dropped this provision), that restrictions will apply to anyone who has a 'material impact on a firm's risk profile,' and that there will be mandatory deferrals (40-60%) and clawbacks.

The less familiar stuff says:

1) The new rules will affect all staff at banks operating in the EU, and at all worldwide operations EU banks

While this means all staff in London would be affected, the Financial Times points out that it also means that all bankers at Barclays or Deutsche in New York or Asia will be affected. People at JPMorgan or Goldman will not.

Probable effects: EU banks will find it difficult to compete.

Barclays will move to New York, HSBC will move to Hong Kong. No bank will want to be headquartered in the EU. US banks' future expansion will take place elsewhere.

2) Bonuses WILL be restricted as a multiple of salary

This was floating around previously and has been firmed up. There are still no indications as to what the multiple will be, but at risky banks the multiple will be set low.

Probable effects: Risky banks will pay higher salaries and increase fixed costs, making them riskier still. Risky banks will find it harder to attract and retain staff, making it harder for them to compete, making them riskier still.


Big, non-risky, non-EU banks will benefit massively. Goldman Sachs, JPMorgan, Citigroup, BAML and Morgan Stanley must be feeling rather pleased.

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