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Morning Coffee: London bankers could be in for a shock when the bonus cap is lifted. Most nepotistic bank breaks with tradition

If you work in banking, it sounds like some much-needed good news; Kwasi Kwarteng, the new Chancellor of the Exchequer, is apparently planning to remove the regulatory cap on bonuses that has stifled performance related pay in London since 2013. In many ways, the surprise is that this hasn’t already happened – the bonus cap is a piece of EU legislation which was never supported by the British authorities, and the chance to get rid of it was swiftly identified by City lobbyists as a potential Brexit benefit. 

The political optics of “more money for bankers” have never been great, but the incoming government has seen it as an opportunity to boost one of the UK’s most important industries.  And there’s some reason to believe it might work – Richard Gnodde of Goldman Sachs told the FT that “it would make London a more attractive place for sure”.

But London-based (or for that matter Birmingham-based) bankers might look at Gnodde’s reasons for being so much in favour of removing the cap and ask themselves whether it’s such great news after all.  The problem that global banks like Goldman have always had with the European bonus cap rules is that it builds in a high level of fixed cost; if you want to keep total compensation competitive for a senior person, you need to set their basic salary (plus “role based allowances”) at a high level.

That means that really senior bankers (like Dan Pinto when he was based in London) end up getting really large amounts of cash every month; their compensation is much less variable and has a much lower long term or equity component than their US counterparts.  With uncertainty about revenues, Wall Street firms might be more than happy to cut salaries and redress the balance with bonuses that can be massaged lower in difficut years. We could even see a few heads of trading desks, particularly in rates and FX, moved across the Atlantic, which is precisely the effect that Kwasi Kwarteng intended.

But bankers who had rather got used to the security of a chunky salary might be less keen.  Even if, over the cycle, uncapped bonuses are better (total comp is about 30% higher in New York, adjusted for currency), the immediate effect of changing the system might be a considerable sticker shock.

If the cap is lifted, it could have implications for European banks' appeal as employers too.  European banks still subject to the bonus cap by virtue of their country of origin and that therefore keep the old high-salary/low-bonus structure, could find themselves more appealing to the sorts of bankers that prioritize stability and salary over volatility and performance pay. Those bankers may be lower performing. However, US banks that are free to pay high bonuses will attract people at the other end of the spectrum. This would come as the Europeans are also trying to grab a competitive advantage by being more willing to let people work from home, suggesting that organisations from the EU and US could end up populated by very different kinds of people.

Equally, though, if the UK goes through with this, the European legislators will be under pressure to review whether the bonus cap is really worth having.  It was passed in a populist fervour in 2013, against the advice of a lot of the actual regulators, and it’s not obvious that it’s done much to reduce risk taking.  The whole banking world might be going back to the model of lower base, high but volatile bonuses and a lot more of the risk intrinsic to the industry being borne by employees rather than shareholders.

Elsewhere, it’s the end of an era – for the first time in the history of Rothschild & Co, the chairman of the board will not be a Rothschild family member.  The bank won’t exactly be Rothschild-free; Alexandre de Rothschild will still be executive chairman.  But David de Rothschild, the banker credited with bringing the family firm back from the brink in the 1980s, will be handing over the chair of the supervisory board to Marc-Olivier Laurent.

Many banks have gone this way in recent years – Lombard Odier isn’t managed by a Lombard or an Odier, Safra Bank isn’t run by a Safra and even Banque SYZ, where the founder is still alive, isn’t run by a Syz.  Many more of the great banking fortunes of history are family offices now. 

It makes the rare remaining hereditary chairs, most famously Ana Botín, look more and more like anomalies.  You can’t really attract ambitious people into an organisation in which the only two paths for promotion to the top job are birth and marriage.

Meanwhile …

As Credit Suisse gets ready to unveil its new strategic plan, a court case in Singapore might be about to throw new light on whether certain kinds of low-risk, capital-light wealth management businesses are all that great after all.  The case is going to turn on a question of how much of a duty of care a trustee services business that CS owned there had, and the extent to which its existence puts CS on the hook to compensate a billionaire for the losses attributable to a fraudulent banker.  If CS lose, then operations like this might need to be substantially beefed up with compliance and due diligence functions. (Bloomberg)

Citi is still spending a lot of money and management time on repairing its risk management systems, and regulators’ patience is apparently fraying.  It’s interesting to compare this situation with that of Deutsche Bank a few years ago – the underlying technology problems seem comparable, but Citi is somehow managing the issue in such a way that it doesn’t overshadow the whole business to the same extent. (WSJ)

The actors playing junior bankers in “Industry” apparently have to spend take after take snorting fake drugs which are actually milk powder, and they hate it. (Buzzfeed)

Former Barclays CEO Bob Diamond’s firm Atlas Merchant Capital taken a “strategic” equity stake in Cascadia Capital, a Seattle-based mid market boutique.  They’re going to use the money to hire people and expand the M&A franchise. (Bloomberg)

An executive at Starling, the fintech challenger bank, has won a tribunal claim against the company for not being sufficiently accommodating of her asthma disability, and for saying she was “not a Starling person” for going home at 5:30pm every day. (FT)

Citi have hired Barry Weir, a 22 year veteran investment banker in the natural resources sector, from JP Morgan. (Bloomberg)

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AUTHORDaniel Davies Insider Comment
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  • Jo
    Jokonia Mupani
    17 September 2022

    Very interested

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