In Europe’s fight over banking bonus caps, Britain may have to shoot its golden goose

Bankers face the bonus cap blues.
Bankers face the bonus cap blues.
Image: Getty Images / Oli Scarff
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Update (Feb. 28, 5.00am EST): The European Union has struck a preliminary deal to create a bonus cap of one year’s salary on bankers. A banker can receive two times his or her salary in bonus if shareholders approve, according to the rule that could go into effect as early as next year. ”For the first time in the history of EU financial market regulation, we will cap bankers’ bonuses,” says Othmar Karas, an Austrian lawmaker who was part of the negotiations.  The cap applies to those working for an EU firm whether in Europe or elsewhere, one official said.

Original story (Feb. 27, 1.25pm EST)

Member states of the European Union could agree today to cap bankers’ bonuses at no more than 100% of annual base salary. The rationale is to cut incentives for excessive risks and make banks safer, but British officials have been quietly but furiously lobbying against it (paywall) to protect the country’s financial sector.

But it may be a losing battle for Britain. EU states, including Germany, have said that while they sympathize with the UK’s concern they will support a cap if it allows them to pass broader legislation on bank capital requirements, Basel III, of which the bonus caps are a part.

Secondly and perhaps more importantly, shoring up Britain’s financial sector isn’t a political winner for UK officials. Before the financial crisis in 2007-08, London’s financial center, better known as “the City”, was seen as a golden goose and part of the country’s economy that the government openly and proudly defended, says Philip Whyte, a research fellow at the Centre for European Research, in London. ”That’s been blown out of the water now,” he says.

Today, the City employs nearly 700,000 people in financial services and accounts for about a tenth of UK economic output. But in a country where incomes have stagnated to 2003 levels, struggling residents either blame the banks for the crisis or resent what bankers earn in comparison to their own stagnant wages. A survey by YouGov in August last year found that 36% of UK adults believed the British banking industry had a widespread ethics problem; 30% believed that all British banks were driven by greed. Only 1% said they believed banks had learned their lessons from the financial crisis.

Median hourly wages have fallen back to their 2003 levels, in real terms. Bankers’ bonuses have in fact fallen even more sharply of late, from a peak total in 2008 of £11.5 billion to £4.4 billion ($6.7 billion) last year, and could fall to £1.6 billion in 2013, according to the Centre for Economics and Business Research. But they are still 10 to 20 times people’s base salaries.

British banks and the government are trying to remedy the sector’s image. Next week, Barclays discloses how many of its 140,000 staff earned above £1 million last year, after stating last week it had cut its bonus pool for 2012 by 15%. The government is requiring Barclays, Lloyds, HSBC and Royal Bank of Scotland to repay those it “mis-sold” financial instruments that cost residents and small businesses thousands of pounds in the financial crisis. British bank regulators have also pledged to forcibly dismantle banks who don’t separate their retail businesses from their riskier investment operations.

As we’ve written before, there will likely be loopholes in any version of the bonus cap, of which a decision or announcement of further delay is expected tonight. Which means for the British government, there’s little getting around a public angry at its banks.