The EU bonus cap has increased the risk of instability in the financial sector, Bank of England researchers said yesterday.
Chancellor George Osborne is being urged to press the EU on removing rules capping bankers’ bonuses after the Bank called the policy “counterproductive”.
The Bank said that the cap, which restricts bonuses to 100 per cent of fixed pay, cuts the link between performance and pay. It also restricts the banks’ room for manoeuvre when times are tough.
Bankers’ fixed pay as a share of total pay has risen from 28 per cent to 54 per cent since 2013 while “remuneration costs in the major UK banks have remained broadly constant”, according to the Bank’s quarterly bulletin.
Higher fixed pay can “impact negatively on resilience within the financial system”, the Bank said.
Mark Garnier, a member of the influential Treasury Select Committee, told City A.M. that the bonus cap is “imbecilic”. He said: “If it means that Cameron needs to bring this in to the [EU] renegotiations, then maybe he should do.”
London MEP Syed Kamall added: “Sadly I doubt they’d listen to Britain on its own – but the government can make the case that this is counterproductive and look for similar evidence in other European countries.”
Osborne himself dubbed the cap counterproductive earlier this month, saying: “It heads in exactly the opposite direction to the direction of travel we all agreed in 2009-10 needed to be undertaken. The UK made its opposition to that very clear… We took the matter to the European Court of Justice, which unfortunately we lost.”
Andrew Bailey, the Bank’s deputy governor for prudential regulation, was the sole member of the EU’s Board of Supervisors who voted against the bonus cap last year. He and governor Mark Carney have been vocal in their opposition to it. However, the Bank was outvoted 27 to one.
“Andrew Bailey is a very wise and intelligent man… and we must support him,” Garnier said.
“This is not just anyone rambling on about this; this is the guy who runs prudential regulation, backed up by the institution that is top of the pile when it comes to UK financial services regulation. It’s vital we throw our weight behind Bailey.”
Carney said in October that the cap “weakened discipline from remuneration” and called for “clear principles to safeguard the interests of non-euro [EU] member states”.
Chris Cummings, chief executive of TheCityUK, told City A.M.: “People look to the UK for expertise on financial regulation and for the bank to be saying this is very welcome. It will have considerable impact across European regulators.”