Winning a banking battle

By listening to its citizens and introducing tough new rules on bankers’ bonuses, the EU has, at least for now, dampened the speculative froth.

The European Union’s adoption of a system of legal trip-wires to restrict bankers’ bonuses is the finest act of political opportunism since Viviane Reding realised that cutting mobile phone roaming charges would put her at the top of the popularity league in José Manuel Barroso’s first European Commission.

It matters little that the new rules adopted by the European Parliament and the Council of Ministers codify measures that either many member states have already put in place or that have been reluctantly, but voluntarily, applied by some banks themselves. It can be good politics to follow as well as to lead, particularly when the public is as ready as ever it was to blame the bankers for our present woes.

Well endowed though it might be, the Commission’s communications budget could not have bought the media time and newspaper space favourably dedicated to the Parliament’s adoption of its final text. Good headlines will not turn around Euroscepticism in those countries where it is most deeply embedded, but at the very least the EU has demonstrated that it has been listening to its citizens by imposing the toughest conditions anywhere in the world on bonuses.

And what of the claim that Europe could pay a price for its crusade against the banking community? How, City of London spokespeople are now asking, can we hope to attract and retain talent when the prospective financial rewards in banking are so hedged around with restrictions? Who, they wonder, would want to work in a system that will actually make bonus-earners wait for up to five years for around half their bonus and receive only 20%-30% upfront in cash?

Has Europe put itself at a competitive disadvantage, particularly in relation to the US, which has posted guidelines rather than legislation on how banks should organise their bonus schemes? When banks are recruiting again, it is possible that European operators may lose some staff and fail to recruit others in competitive job markets. But will it matter? Obviously, we want talented professional bankers who create, market and manage products that help clients to grow their businesses, invest their savings for reasonable returns and keep their money safe. Why should we worry about a ‘greed drain’ of individuals looking for totally disproportionate rewards for deals that could put their banks and their clients in dire jeopardy?

The new legislation on bonuses offers the EU the tempting opportunity to pioneer the concept of ‘ethical banking’, in which risks are carefully assessed and calibrated, transactions are transparent and the customer’s interest is paramount. If, as a result, European banking is duller than its American counterpart, slightly less profitable but much less likely to burn taxpayers’ money in emergency bail-out packages, then these shortcomings will be far from fatal.

Examined on Wall Street or in the City of London, this proposition is seen as fatally tainted by a naïve view of bankers and their profession. It is certainly true that you cannot take all risk out of investment banking, while financial incentives are essential for both rewarding performance and firing creativity and entrepreneurialism.

Nevertheless, the onus is on the banking community to demonstrate that its interests lie in more than just maximising personal wealth at the expense of the client. I have seen precious little effort from that quarter to persuade us that the governing moral code in their business is closer to that of Siegmund Warburg than of Bernie Madoff.

Appropriately, in the same week that the Parliament was nailing down bonuses, British newspapers were carrying reviews of a new biography of Warburg by the British historian, Niall Ferguson. The author’s website describes Warburg as “one of the architects of European financial integration” – certainly one good reason to remember him. More relevant in these times was his choice of “moral standing” as the first of five elements of the best kind of banking. I am sure the present generation of investment bankers would see Warburg’s approach as old-fashioned, outdated and unfit for the modern world. His posthumous reward was S.G. Warburg’s loss of independence as it was acquired in 1994 by Swiss Bank Corporation.

Though many of the details have not yet been pencilled in, the EU’s no-nonsense and rigorous approach to controlling bonuses will come to be seen as a highly sensible means of dampening down the speculative froth that caused the economic crisis. The reason for such confidence is the fact that, no matter how diverse the regulatory frameworks that emerge from the G20 process, the brightest and most creative investment bankers will find new ways to ramp up risk and investment returns. Europe, at least, will make them wait for their money, force them to share some of the risk they load on to clients and accept that their ultimate gains must relate to performance over a period of years.

For their part, bankers must work hard to change the opinion of the Chicago signatory of a recent letter published in the Financial Times: “I advise my coming-of-age children, and their peers, who seek satisfying careers, to avoid banking and finance; unless, of course, they want to cede building character to building personal wealth.”

John Wyles is the chief strategy co-ordinator at the European Policy Centre in Brussels.

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