The European Union’s cap on banker bonuses introduced after the financial crisis a decade ago can help to curb excessive risk-taking, a Bank of England study showed today.
Britain had unsuccessfully opposed the cap, but bankers in London have been nurturing hopes that it could be discarded now that the country has left the EU and no longer has to apply its rules from January.
Under the rule, a bonus can be no more than 100 per cent of a banker’s fixed pay, or double that amount with shareholder approval. The deferred non-cash portion of a bonus can also be clawed back if any misconduct emerges.
“This finding supports the view that some appropriately designed restrictions on bonus payments could mitigate excessive risk-taking,” the Bank of England staff working paper said.
Britain had argued that the cap would be counterproductive by bumping up fixed pay.
The central bank’s research said its “lab experiment” using university students showed a tendency to take greater risks when someone’s bonus was linked to investment performance relative to that of his or her peers – a common feature in financial firms – than when it depended on a person’s own performance only.
A separate Bank of England working paper today said the central bank’s asset purchase program during the financial crisis did not directly boost lending by banks to the economy even though some knock-on effect had been expected.
This was probably due to banks not holding enough capital at the time, the paper said.
In the current COVID-19 recession, the BoE revived asset purchases, though this time round banks are far better capitalized.