Yesterday the European Parliament passed a historic package of financial legislation following almost two years of negotiations. The most widely publicised aspect of these new rules is the cap on bankers’ bonuses, introduced in an amendment by the European Parliament and supported by Lib Dem MEPs. As well as the moral justifications, there are many good rational reasons for the cap. Significantly, it will realign the bonus to salary ratio to more reasonable proportions, thus reducing the kinds of excessively risky behaviour which contributed towards the financial crisis. It is important for banks to show restraint and take a more long-term, responsible approach, particularly when tax-payer funded bailouts and individual savings are at stake.
However, it would not be appropriate to simply copy and paste the same bonus cap across all financial services legislation, as some MEPs are now trying to do. Banks are unique in the sense that only they can create money off the back of liquidity provided by the central bank, which is ultimately underwritten by the tax payer. This is what has happened over the course of the most recent crisis. Fund managers, who in the end are not underwritten by the taxpayer and who are putting up money belonging to themselves or to private investors, should not be tarred with the same brush as banks. While we may want to consider limits on pay for investment funds in order to maintain a level playing field, we need a more nuanced approach that distinguishes between different business models, rather than simply lashing out at the industry as a whole.
Furthermore, while capping bankers’ bonuses has inevitably stolen the limelight, it is important to remember that this was just one small part of a whole raft of legislation. One major innovation is the introduction of country-by-country reporting in the financial sector, meaning that banks will have to disclose their profits and tax arrangements in each country in which they operate. Similar rules were just introduced by the EU in order to boost transparency and reduce corruption in the extractive industries. I will now be working to ensure that such requirements are applied across the board in all sectors so that all multinational companies pay their fair share in tax, something I have long called for in my “Own Up, Pay Up‘ campaign.
This package of legislation also includes measures to kick-start economic recovery in Europe. These include incentives for banks to lend small businesses and measures to encourage short-term trade finance loans, giving an important boost to growth, jobs and innovation and getting more money flowing again in the real economy.
Within the overall EU framework, we have also retained the flexibility for individual countries to impose stricter requirements on banks, for example to address bubbles in the economy such as in the housing market and to enable the ring-fencing of retail operations. This will allow the Coalition Government to implement the Vickers recommendations, separating high-street retail banks from their investment arms and helping to ensure that taxpayers do not bear the costs when risky investments fail.
So while bankers’ bonuses may be the only issue to hit the headlines, it is important to remember that the latest package of EU financial regulation is about much more than just this. It is about promoting economic growth, ensuring a level playing field across Europe, while making banking system more secure, sustainable and transparent.
* Sharon Bowlies is a Liberal Democrat MEP for South East England
Follow @LibDemVoice on Twitter
Like us on Facebook
Subscribe to our feed
Sign-up for our daily email digest
Mystery at Witchend is Went the Day Well? and Seven White Gates is A Matter of Life and Death
The long role of the Jewish community in Liverpool
Labour's post-election (non-)honeymoon: The Week in Polls
September now
Farron photos
Joe Bourke
Peter Martin
Mick Taylor
Michael BG
Jennie
15 Comments
” it will realign the bonus to salary ratio to more reasonable proportions,”
Yes, high fixed costs that is a much more stable model.
“thus reducing the kinds of excessively risky behaviour which contributed towards the financial crisis”
Nothing to do with governments and central banks flooding the market with cheep money then?
“Fund managers, who in the end are not underwritten by the taxpayer and who are putting up money belonging to themselves ”
Do you understand what a fund manager does?
“These include incentives for banks to lend small businesses”
How exactly?
We really are doomed, aren’t we.
Bit harsh PSI.
I have always seen Sharon Bowles as a very astute politician who more than earns her crust in the European Parliament.
The bonus capping issue is a serious effort to bring about culture change notwithstanding the weakness you note that fixed costs may very well increase as a consequence.
Nothing to do with governments and central banks flooding the market with cheap money then? I think most would agree that the principal cause of the banking crisis lay in a combination of excessively risky behaviour across the board in the financial sector and the recycling of hot money accumulating as a consequence of major international trade imbalances. Central bank flooding of the market with ultra-cheap money came in the wake of the crisis.
Do you understand what a fund manager does? Fair point!
The Coalition Government implementation of the Vickers recommendations, separating high-street retail banks from their investment arms and helping to ensure that taxpayers do not bear the costs when risky investments fail will be the key issue for UK banking.
Isn’t it funny how MEPs think they are better at running banks than bankers. Ludicrous.
Let me take this article apart:
Capping bank bonuses won’t reduce sales targets and will just increase the banks fixed costs and reduce their ability to lend. Quite frankly this piece of legislation is disgusting; it is the politics of envy.
“Banks are unique in the sense that only they can create money off the back of liquidity provided by the central bank, which is ultimately underwritten by the tax payer”
One of the main causes of the financial crisis was lowering interest rates to levels that do not represent the risk underwritten by the tax payer. This is why I have become very interested recently in the merits of privatising the bank of England. People will say this is crazy, but if it was offering rates on a commercial basis there never would have been a credit boom followed by a credit bust.
“While we may want to consider limits on pay for investment funds in order to maintain a level playing field”
What!? Why are you in the business of pay capping? If one fund has a rubbish performance record and another has a great one, should they have the same charges? This is a typical example of socialists thinking everyone deserves the same pay.
You mention corporate tax avoidance but pretty much all corporate tax avoidance is the responsibility of the Treasury, so don’t get on the moral high horse on this as well.
“This package of legislation also includes measures to kick-start economic recovery in Europe. These include incentives for banks to lend small businesses and measures to encourage short-term trade finance loans, giving an important boost to growth, jobs and innovation and getting more money flowing again in the real economy.”
So you are going to use tax payers’ money to underwrite loans to risky small businesses, that otherwise the banks wouldn’t touch? We would be better off if you just butted out of it and let the banks decide who to lend to.
“Within the overall EU framework, we have also retained the flexibility for individual countries to impose stricter requirements on banks, for example to address bubbles in the economy such as in the housing market”
What? Who are the ones printing money and underwriting mortgages, creating the next bubble? The politicians.
“So while bankers’ bonuses may be the only issue to hit the headlines, it is important to remember that the latest package of EU financial regulation is about much more than just this. It is about promoting economic growth, ensuring a level playing field across Europe, while making banking system more secure, sustainable and transparent.” –
No it’s not, it’s about kicking the bankers. I’m not asking for no regulations, but the last thing we need to do to do floundering banking sector is to choke it off with regulation and tell them how to run their banks. To which many will respond by flying off to Singapore.
@Psi “We really are doomed, aren’t we.” – I know, the incompetence is shocking.
Eddie Sammon: “Isn’t it funny how MEPs think they are better at running banks than bankers. Ludicrous.”
Have you been in a catatonic trance for the past six years? A bunch of schoolchildren would have made a better job of running the banks.
Eddie Sammon
“Isn’t it funny how MEPs think they are better at running banks than bankers. Ludicrous.”
Oh and I suppose the bankers have really shown how competent they have been in recent years at running banks, and with such probity? I suspect many other professions or individuals could probably have made a better job.
Look, I agree the banks contributed towards the crisis (of course), but all of the measures mentioned above is overkill.
Just as well Sharon Bowles is standing down at the next elections. She seems to exhibit an unerring knack to pick the most illiberal positions even when, like in this scenario, they are also likely to exacerbate any issues in our financial sector. Her level of ignorance is stunning 🙁
JoeBourke
It may appear unfair but the politicians response to this has been very scary. the focus on the bonus cap is insane, changing rules to make caw backs easier and more effective would be a positive step but instead they focus on a cap which is intended to be populist but as soon as you discuss the impact of this with the average person they see it as opportunistic.
“The Coalition Government implementation of the Vickers recommendations, separating high-street retail banks from their investment arms and helping to ensure that taxpayers do not bear the costs when risky investments fail will be the key issue for UK banking.”
You raise a good point about there being actions that can be taken by politicians. Personally I don’t see Vickers as adding any benefit as assumes investment banks will bring down retail when it is just as likely to go the other way. what would be a better use of time is to devise a more effective bankruptcy reigeme for banks. That will be in two parts one ensuring losses are effectively dealt with (share holders loose first, then bond holders then depositors but with the ensurace mechanism working).
the second part is how to protect the “utility company” part of the institution such as the roles in the payments systems operations the infrastructure, this would also necessitate some form of “pure custody” function being made available as well. These changes will require a clear legislative frame work some parts at a national level and some at European level. But these are the hard questions which will be genuinely difficult (my explanation oversimplifies) and as a result politicians look to play blame games.
I don’t see when the next crisis hits that the system is any more stable than 2007. Which is inexcusable.
“Oh, terrible – we shouldn’t listen to any MEP whether from the UK or elsewhere and regardless of Party. ” Reading your respondents they all sound like a newly established Canary Wharf branch of UKIP. Even allowing the EU carrying the basket case of the Greek economy, the endemic corruption of post-Berlusconi Italy and the failed seaside property boom of Spain, the Euro still trades at around 85p per Euro, up from 62p when it was founded around 12 yers ago. It’s been trading at that level throughout the Southern European crisis of the last 2 years, although it is down on the near-parity the Euro achieved following the belly-up failure of our own incompetent and morally corrupt banking system in the UK.
Not quite sure why Mr Sammon is commenting on a Lib Dem website? He’s clearly not a Liberal as his views would make Genghis Khan seem like a moderate.
If he’s content to leave banking in the hands of bankers then he must live on another planet to the rest of us. That’s just what Thatcher, Blair and Brown did and look where we ended up!
If he really believes that every attempt to control capitalism is ‘socialism’, then he clearly needs a course of re-education to acquaint him with what these concepts mean. My third year university students know far better than he does what the various ‘isms stand for. He reminds me of 80’s and 90’s US Republicans for whom any deviation from the the pure milk of unadulterated capitalism was decried as ‘socialism’ or ‘communism’ and more recently those same people calling the very limited health care reforms introduced by Obama as ‘socialist medicine’ and who claim it will lead to legalised death lists.
Come on Eddie, go comment on Conservative Home. You are clearly wasting your time on us Liberals!
I admit, while I disagree with telling Eddie to go away just because I do not agree with, it is hard to take Eddie seriously while he continually misunderstands key terms like socialism. Even if the proposed bonus cap was saying every banker should be paid the same – which it quite clearly is not – Socialism does not propose that everyone should be paid the same.
How do I not understand the term socialism? Socialism used to mean steep progressive taxation and public ownership of the means of production. Since then it appears the meaning has changed because the likes of Labour still call themselves socialists and that is fine.
I cannot go on Con Home if I believe in increasing taxes on the rich. I want to tackle the vested interests in society but this does not mean capping bonuses and using tax payers’ money to underwrite risky loans.
Try being a member of the Conservative Party and increasing taxes on the rich, getting rid of monarchy, the lords, integrating with the EU and introducing proportional representation in the UK. Just because I spout a few Conservative views does not make a conservative.
I am also yet to be won over on the merits of introducing competition into the NHS and state education (it’s a bad idea from using my own logic), so I am definitely not one of those liberals who think “private good, public bad”.