EU’s tough bank pay curbs could backfire says UK

Europe’s move to introduce the world’s toughest curbs on bankers’ pay could backfire and shows the need for better global coordination of new financial rules, a government minister said Wednesday. European Union banking supervisors are finalising the curbs on pay in the bloc’s financial sector, seeking to stop traders and other senior bankers from taking excessive risks that could destabilise markets.

The new curbs, part of the EU’s revamped capital requirements directive (CRD3), take effect in January and apply to bonuses awarded from this year.

Britain’s financial services minister Mark Hoban said the EU has been prepared to move further and faster than the United States and the Far East in curbing banker pay.

“This risks creating an uneven playing field and perpetuating the mismatch between the risks and rewards for managers and traders on the one hand and shareholders’ interests on the other which characterised the run-up to the crisis,” Hoban told the Royal Institute of International Affairs.

“It highlights the need for more effective mechanisms for the co-ordination and implementation of global agreements,” Hoban said.

The Group of 20 leading economies (G20), which includes Britain and other major EU states, signed up to a set of global principles on curbing excessive remuneration last year.

The G20 rules, which the United States and leading Asian countries like Japan, China and India will apply, are less draconian than the new EU law.

Last Friday bankers from top lenders in France, also an EU and G20 member, said the bloc’s curbs on pay could cause Europe’s banks to lose top staff to American or Asian rivals.

Britain is Europe’s biggest financial centre and Hoban said: “We’ve seen the direct benefits in employment, wealth and tax revenue from financial services businesses based in the UK.”

The G20 is due next week in Seoul to endorse Basel III, a package that toughens up bank capital and liquidity rules.

Banks have warned that the package, even though it won’t take full effect until 2019, could hinder lending and economic recovery, a view banking supervisors have rejected.

“We need to resist pressures to weaken Basel III and we need to promote consistent, full implementation,” Hoban said.

The G20 will also endorse broad principles that back tougher supervision and standards on the world’s biggest banks whose failure would destabilise global markets as seen with the demise of U.S. Lehman Brothers in 2008.

G20 members are sparring over the finer details, with Britain wanting to push ahead with extra measures such as capital surcharges while others like France oppose this.

“We need specifically to develop global agreement for dealing with systemically significant firms,” Hoban said.

“And in Europe we need to ensure that negotiations on the so-called CRD IV capital requirements directive deliver the same result,” he added.

He also spoke of the need to avoid creating barriers in global financial markets which could stifle innovation.

“That’s why an essential counterpart to reform of the global financial sector must be action to address major sect oral and international financial and trade imbalances,” Hoban said.

“Tackling these imbalances leads to a more stable and sustainable economy and this is good for growth.”
Source: Reuters

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