Financial Regulation: Is Europe Shooting Itself in the Foot?

The European Parliament adopted yesterday a final text on bonus caps for bankers. At first glance, this is good news: the issue of bonuses for traders and bankers (additional pay and variable pay) shows that Europe, which is often said to be unmoving, is advancing. But it also indicates that good intentions can have unexpected and possibly risky consequences.

The European Parliament voted yesterday on a text that, for bonuses, covers a good distance. Starting January 1, bankers can no longer get more than 30 percent of their bonuses in cash (20 percent when the bonuses are very high) and payment of 40 percent to 60 percent of total variable pay will be delayed over time – between three and five years. The important point is that traders in financial markets who earn a year-end bonus won’t get much immediately in cash, but will get some in shares later.

We aren’t crying over employees who often make outrageous fortunes. In this text, the European Parliament has set out an entirely laudable goal: to end excessive risk-taking born of greed. We know that distributing huge bonuses has played a role in the crisis. But the question is whether Europe won’t shoot itself in the foot with standards that the Anglo-Saxon media acknowledges are the strictest in the world; harsher than those recommended by the G20; harsher than those agreed upon by the United States. It is a paradox to see that Europe is going farther and faster than others when the crisis is originally an American one, and when those primarily responsible are American investment banks, the American Federal Reserve and American regulators.

Barack Obama passed a major financial reform, which has been discussed extensively in Europe and rightly so. But we know that it is not extremely accurate; it provides mostly general principles (“guidelines”) that will be relaxed later by various regulations and varied with all possible lines of interpretation. We mustn’t hide the fact that what worries European banks goes beyond the issue of bonuses. The point to keep in mind is that there is a ferocious competition between banks and an existing flaw in the system could allow U.S. banks in Europe to apply the American regulations. The French, German and British banks thus fear a sudden flight of their teams.

We can hope that the U.S., Singaporean or Hong Kong legislatures, touched by grace, follow Europe! Or that changing attitudes truly take place everywhere. Otherwise, there will be movement, and the Europeans could lose financial activity – a useful [byproduct]. Everyone has an opinion on the issue, but this episode has raised awareness that nothing is neutral even in regulation. When it comes to banks, it is still necessary that they occupy a much more important place in financing the economies of continental Europe and the United States, where companies directly finance the markets. Bank regulation doesn’t affect them in the same way. Europe must naturally be at the forefront of regulation– but it mustn’t be naïve.