Bankers in Europe’s most important financial center are hoping that the new Conservative government will relax the rules for the industry.
(Photo: Bloomberg)
Barely in office, the new British Prime Minister Liz Truss and her Finance Minister Kwasi Kwarteng are apparently considering lifting the cap on bankers’ bonuses. The intention behind this is clear: although the City of London will still be the dominant financial center in Europe even after Brexit, there is a risk of a gradual loss of importance. This is exactly what the new Conservative government wants to stop, and deregulation appears to play a key role in this project.
After the financial crisis, the EU capped the controversial bonuses at twice the fixed salary. After Brexit, the British no longer have to abide by these rules.
The abolition of the bonus cap would not be the end of the regulatory world. It is true that the wrong incentives set by the banks’ bonus policy played an important role in the development of the financial crisis. However, it was less about the absolute amount and more about the structure of the premiums. Put simply, bankers were rewarded in the short term for taking long-term risks. The spread of bonuses over time and the possibility of claiming them back are therefore more important than limiting the absolute amount.
The new government is ready to deregulate even in critical areas
But Liz Truss’ plans still send all the wrong signals. The new conservative government is making it clear that it is willing to deregulate even in critical areas in order to promote the economic interests of the Brexit-damaged country. The abolition of the bonus cap should only be the first step.
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Apparently, Truss also wants to emulate her idol Maggie Thatcher when it comes to deregulation. In 1986, she proclaimed: “Let’s throw away the rules that slow down success.” It was the spark for the Big Bang, with which Thatcher wanted to create the basis for London’s rise to become a global financial center. That went well for at least two decades. Then the global financial crisis showed how risky this business model is.
>>Read here: New dispute over caps on banker bonuses in London
In the major reform project that supervisors and politicians launched after the financial crisis, individual rules may make more sense than others. As a package, however, they have proven themselves so far. Anyone who, like the British, starts to put together this package is negligently taking enormous long-term risks for a few short-term advantages.
More: Bankers expect fewer bonuses – is the big wave of layoffs now imminent?