European Union Agrees To Cap Banker’s Bonuses


In a move, typical of Europe, the European Union has agreed to put a cap on how much of a bonus a banker can receive.  It’s part of a deal on new financial rules for the EU where bonuses would be capped at one year’s salary but could rise to two years, if approved by shareholders. The UK, which hosts Europe’s biggest financial services centre, was opposed to any caps on bank bonuses.  In response, Prime Minister David Cameron said, “We are absolutely clear that we must be able to implement the Vickers plan in the UK, which in some ways is tougher than regulations that are being put in place in other European countries.”  He continued, “We want to have this proper ring-fence between retail banks and investment banks and the rules must allow that to happen.”  The idea behind the plan is to keep saving and business accounts from being using for highly risky speculative investments; part of the cause of the financial crisis in the US as well. The counter argument to that is by limiting bonuses to one year’s salary, you limit the talent you can attract.  Business people will seek greener pastures. European Parliament’s chief negotiator Othmar Karas said,  “For the first time in the history of EU financial market regulation, we will cap bankers’ bonuses.”  He explains the reason for the cap in this way, “The essence is that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business, namely financing the real economy, that of small and medium-sized enterprises and jobs.”  Karas is clearly a Socialist and espouses that philosophy.  However, others strongly disagree with this position.  Joe Rundle, head of trading at ETX Capital, in London, said the cap would backfire. He told the BBC: “It will drive up fixed salaries to compensate. Businesses that do not need to be inside the European Union will leave. And when banks invest in future divisions, it will be outside the EU.”  He is completely correct.  Strong controls of a free market environment will force companies and investors to seek other alternatives and will ultimately hurt the EU.  For better or worse, where controls are limited, markets thrive; even if that means there will be abuses.  The EU would be far better off talking about severe penalties for those that abuse the system or are involved in illegal activities.  Attach mandatory sentences for such abuses.  That would be a deterrent.  But to limit bonuses, sets the EU back to the Dark Ages.

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