Bankers receive cap on bonuses

Local experts have criticized new European Union measures to restrict bankers' bonuses, saying the rules "miss the point" and are simply a means for political point scoring by European politicians. While they concede the new rules will have little impact here in the Czech Republic, the tough new restrictions could result in a brain drain with the risk that top banking executives will move to Asia and the United States.

The criticism comes after the European Parliament agreed to cap big cash awards across the European Union in a move described by officials as the world's strictest rules on bankers' bonuses.

"It's generally a political step; it's about points for politicians," said Miroslav Adamkovič, an equities analyst at Komerční banka. "It will not have any effect on bankers taking fewer risks. It's just about politicians presenting something to voters and the general public."

Milan Lávička, banking analyst at Atlantik FT, agrees, saying the move is "more of a political decision than an economic one."

"It is politicians trying to take steps for voters, and most bankers will find a way to avoid the restrictions," he said. "It tells voters that there is a solution to the sources of the crisis, but it will not solve the problems of the financial crisis and problems in the future."

Under the proposed measures, bankers will only be able to receive between 20 percent and 30 percent of any bonus in upfront cash. Banks will also be required to defer 40 percent to 60 percent of bonuses for three to five years, and half of any immediate bonus must be paid in shares or in other securities linked to the bank's performance. The measures are expected to be adopted at an EU finance ministers meeting in the week of July 12.

EU Internal Market and Services Commissioner Michel Barnier said the rules "send a strong political message: There will be no return to business as usual."

"Banks will need to radically change their practices and the mentality that has led in many cases to excessive risk-taking and contributed to the financial crisis," he said.

But Patria Finance banking analyst David Marek said the harsh measures simply "miss the point" because excessive bonuses were not the cause of the global financial crisis.

"We should try aiming at much more important factors that can increase the stability of financial markets," he said.

Marek, however, concedes that regulation of bonuses does make sense for those weaker banks receiving help from governments.

"In such cases, I would say it is reasonable to cap bonuses for management," he said. "But in those cases of banks that survived the crisis intact and without the help of government, there is no need to intervene. It should be solely for the owners and management to decide."

Many also believe the bonus restrictions do not really address much more serious problems in the European banking system.

"There should be more focus on capital and risky investments than bonuses," Lávička said. "I think new regulations for the regulation of capital and risky investments are a better move than these steps."

Adamkovič, meanwhile, cites a Swedish example, where deposits are taxed and loans are accelerated, increasing bank equity and capital adequacy.

"This could be the right way," he said.

And while the EU bonus measures are broadly in line with global recommendations, analysts say the move could make European banks less competitive, especially when it comes to attracting top talent. There are fears that Wall Street could take advantage of the differing regulations, given the United States only has guidelines, and not legislation, when it comes to bonuses.

"I can say that people will move from European to U.S. and Asian banks, but banks will also look to move their banking operations," Marek said. "Definitely."

Lávička and Adamkovič also believe there will be some attrition at the elite level.

"I think it is possible for top bankers, and the labor market for them is quite global, and EU banks will be less competitive in attracting the best people," Lávička said. "I agree that some good bankers could be headhunted because of better conditions."

But most believe the move is unlikely to have a big impact locally.

"It can affect the Czech Republic, but we don't have such a strong bonus culture as in The City [London] and Wall Street," Marek said. "But within investment banking here, it could negatively affect traders and analysts."

Gabriella Hold can be reached at
ghold@praguepost.com