LONDON — It is hard to imagine any European politician losing votes these days by promising to curb bankers’ pay, which may explain why members of the European Parliament are enthusiastically pushing for the toughest restrictions on bank bonuses since the 2008 financial crisis.
Representatives of the Parliament and of the 27 European Union governments were meeting on Tuesday to finalize a deal on banking law that would include pegging bankers’ bonuses at no more than their annual salaries.
The Parliament’s demands for a bonus cap reflect public outrage at continued revelations of huge payouts to bankers. But a side effect has been to hold up enactment of global banking regulations designed to strengthen the capacity of banks to withstand a future crisis.
A majority of member states have come around to supporting the bonus cap. Germany, a late convert to the idea, is prepared to compromise on the issue in order to ensure the wider banking changes are adopted by the elected European Parliament.
The debate has left the British government out on a limb, as it fights a possibly doomed rearguard action to protect the interests of the City of London, Europe’s biggest financial center.
The Conservative-led government believes the bonus cap could have the perverse effect of increasing bankers’ fixed pay, while allowing less opportunity to claw back variable bonuses in the event of poor performance.
Boris Johnson, the outspoken Conservative mayor of London, was quoted on Tuesday as saying, “we don’t need Europe butting in on bonuses,” as he attacked the European proposals as a threat to the City’s international competitiveness.
In the light of popular anti-banker sentiment, however, the British government has been relying on quiet diplomacy to argue its case with European partners in order to avoid the perception that it pushing the agenda of “fat cat” bankers.
It has been left largely to the business media to press the case against a bonus cap. Allister Heath, writing at the City A.M. Web site on Tuesday, suggested that a cap would be a “disaster for London.”
In an editorial this week, which said adoption of the bonus cap would be a defeat for common sense, the Financial Times wrote: “The parliamentarians’ pet idea is a result of populism mixed with ignorance of how banking works.”
“A cap on the ratio of variable to fixed pay will do little to lower total compensation (which is what outrages voters sick of bailing out failed banks),” according to the Financial Times. “It will just encourage higher fixed salaries to compensate for the lack of bonuses that tend to be far larger.”
Mr. Heath, in his City A.M. column, suggested that George Osborne, the British finance minister, was “seemingly too frightened by anti-City sentiment” to block the Brussels proposals.
“The cap will lead to further boosts to base pay, increasing fixed costs and risk,” Mr. Heath wrote. “When business volumes drop, the only answer will be to sack people, rather than cutting bonuses.”
“The fact is U.K. regulators have already created a bonus framework that is tough but fair,” according to Nick Goodway, writing in the London Evening Standard. “Europe is trying to bring in one that could have dire consequences for London’s status as one of the world’s top three financial centers.”
Does this all amount to special pleading on behalf of overpaid bankers? Or do the opponents of the bonus cap have a point? Is the European Parliament guilty of populism, or simply displaying good sense with its proposals to outlaw excessive bonuses?
