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Editor’s take: Toothless regulators won’t bite bonuses

It’s down to regulators to reform the bonus system. And given regulators are powerless to intervene, reform looks as likely as a small village in Hampshire becoming the financial centre of the UK.

Regulators are certainly making scary noises. From Mervyn King’s anti-bonus diatribe, to Sir Callum McCarthy’s call for banks to emphasise long-term performance, snarls and grunts about bonuses have been emanating from the regulatory corner for several months.

However, individual regulators are powerless to make a difference. Mervyn and Sir Callum can gnash all they like, but unless other regulators chomp alongside them, banks will simply resituate themselves in localities amenable to their need to intermittently rain cash on top performers.

If regulators are to force bonus reform, they will therefore need to do so globally. But there is no global financial services regulator. And given three large hurdles barring its conception, birth of such a mega-regulator looks unlikely.

The first hurdle is legislation. A global regulator would mean combining existing local regulations. “That would be extremely difficult, if not impossible,” says Chris Rexworthy, former head of the wholesale firms division at the FSA.

The second is consensus. The US is already having problems building consensus between the Treasury, the President and Congress on the intricacies of a subprime rescue package. Reaching agreement on global financial services regulation would be the equivalent of throwing another 109 stakeholders into the mix.

The third is regulatory protectionism. “Individual country regulators are much too protective of their own patch to allow for a global regulator,” says John Tattershall, chairman of the financial services regulatory practice at PricewaterhouseCoopers. “At the end of the day, failure of a local bank will always be blamed on the local authorities, which makes it difficult for them to cede control.”

In the absence of a global regulator, the world must make do with guidance from the likes of the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions (IOSCO), and the Financial Stability Forum. But without global enforcement, one country’s interpretation of their guidance is likely to differ from another’s – as demonstrated by variations in the implementation of MiFID and Basel II.

With regulators unable to enforce bonus reform, the responsibility is passed to banks. But individual banks have no interest in implementing a system that could mean them losing staff to others or to hedge funds.

For this reason, bonuses look safe. But banks and bankers cannot afford to be too complacent. Extreme times call for extreme solutions: in World War II, the Bank of England was evacuated to Hurstbourne Priors, a small village not far from Andover in Hampshire.

Comments (12)

  1. The bonus system is driven by the banks – and their objectives. If the objectives were long term and answering to shareholders was long term etc. then bonuses would also be long term. The objective of the bank is to increase the share price, there is no moral obligation to bring financial and economic stability – this is surely the role of the regulator and the central bank! Why stop at banks, why not put wage caps on high flying lawyers, surgeons, sportsmen etc. The market should be allowed to dictate the wage and the regulator should concentrate on regulating the system and not the wage.

  2. You have to love the regulators. The prerequisites for the job are terminal myopia, chronic lethargy and acute ineffectiveness. What’s not to like?

  3. Isn’t that just Quantitative Analytics for you?: examines the situation at hand rather minutely, sounds superficially good, apportions necessary roles apparently logically and you still can’t understand a bleeding word of it…

  4. I understood what Mr Quantitative Analytics said…makes perfect sense…and i’m a thick recruiter..Jane I hope you dont work in derivatives…because if you dont understand the above and you do work with complex derivatives we’re all in trouble!

  5. Jane – strange posting there. What is it that you don’t understand?

  6. Don’t see any relevance to sportsmen and surgeons et al(although I’d cap certain fat cat lawyers quite cheerfully). Doesn’t work as an analogy for me. Yes, you can all bless your lucky stars that I don’t work in derivatives, and have trouble telling my distressed debt from my elbow… but I still don’t agree that regulators are the only ones with moral responsibility for stability in banking. Short-term thinking (and mega-greed) created the current crisis, not the regulators. Do bankers (esp. QAs) believe regulators will magic a way out of it? Surely not!

  7. To Jane, From your answered to the above question, I am guessing you do not work in the banking envirnoment. If you cannot understand simply concept about the economic, GOD HELP US!
    What don’t you understand? It is so straight forward – not rocket science.

  8. Why all the screaming about bonuses? Firstly, 40% of all that cash goes to support health care, schools, and the like in form of taxes. Secondly, you have to find some ways to attract the top people – if some idiot regulator did actually find a way to cap bonuses that’d simply mean an explosion in other kinds of perks, that’d be even more expensive to shareholders because they’d be indirect.

    The market should set the wages, the regulators should monitor the banks for solvency, make sure the small depositors are protected through some kind of insurance – and let the banks fail (I’m talking about you, Northern Rock) if they gamble badly.

  9. Me again. The regulators set the framework in which banks work, the banks then maximise profit given the framework. I’m not saying it is morally right, but neither would it be morally right for banks to set objectives outside maximising value for shareholders. The point is that banks would love to pay peanuts (lower bonuses) but the market wage is driven by productivity – as it is for every private sector industry. Who wants to live in a socialist state where skilled/unskilled, productive/unproductive workers are all paid the same wage?!
    Mervyn King should worry about setting rates correctly and bringing economic stability, the FSA should worry about employing people with the right skills. Let’s face it, if the FSA matched city salaries then there would be plenty of talent beating the door down to help correct the regulatory environment.

  10. Sorry darlings in general and Tammy in particular, no I don’t ‘understand simply concept about the economic’. For which I think I can be forgiven. I kinda like Egor on this one. In a good world, bankers make money, regulators protect the little guy, nobody dives into a bucket of blood with their eyes closed (like they all just did). This is where the regulator issue comes in – as Anon goes on to say, ‘regulators set the framework in which banks work’. My whole point is that they didn’t, they won’t and they can’t. It’s nonsense to say that regulators have any clout over the health or stability of the banking environment. They’re toothless. Hence the article title. Bonuses are a complete side-issue.

    Even more Thicko Jane Reply
  11. Got you lot going a bit though, didn’t I?!

  12. Not sure any of you have got the point here. It’s not THE WAGE which is the problem. Create value, earn as much as you like, fine. Package up bundles of crap, sell them to each other, mince around diffidently, earn a huge bonus, not fine. Waste of someone’s money. And space.And source of economic instability to boot.

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