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If there’s one thing bankers like to do, it’s giving themselves titles that make them look dumber than they really are.
Thus, Goldman Sachs has “partners” who are not members of any company, while all other investment banks have “CEOs” who are not part of the board of directors of a company and, in many cases, do not manage anything. The “vice presidents” of a bank are considerably further than a heartbeat away from the presidency. I once worked for a brokerage where the highest rank was “Board Director,” apparently to remind all of us ordinary directors that we weren’t fooling anyone.
Interestingly, regulators follow these status games. The EU has rules to identify “Material risk takers”, who are subject to stricter regulation of their compensation agreements. But they are very widespread: basically, if you earn more than 500,000 euros, you are considered to be one unless your employer can prove otherwise.
Most banks don’t bother to make the effort, so the industry is full of twenty-something “Material Risk Takers” whose actual ability to take risks with bank capital probably peaks by clicking on a link. phishing.
And now, the Bank of England is trying to reverse this title inflation; Under the proposed new rules, only the top 0.3 percent of earners at any company will be considered significant risk takers, and even then, a bank will be able to exclude those who are not truly risk takers at its own discretion rather than do it. requiring prior approval.
It’s combined with some caveats that this isn’t just meant to include high-level traders: the person designing your risk management models is a risk taker, even if they don’t see themselves that way. But the main effect will be to remove many minor league players from the category subject to the most draconian rules on bonus deferrals and clawbacks.
And the proposed rule changes go further: even for real material risk takers, the Bank of England now thinks the seven-year deferral periods are a bit excessive and has reduced them to something closer to global norms.
That’s good news for bankers, but not so much for banks. (I have a little history here; in a very young ageI was involved in the early stages of bonus regulation, something I have apologized for in the past and hereby do so again.) Bonus deferral rules are one of many financial regulations where side effects outweigh the stated purpose.
The stated goal is to align bankers’ incentives with the bank’s long-term financial stability. You will probably achieve it, but it is not such an important goal. Bankers’ incentives are pretty well aligned anyway, since no one really benefits from having an imploding employer on their CV. And the incentives to take risks aren’t really that important. It is very rare for a bank to explode because someone intentionally took a big risk; They usually blow up because someone made a lot of deals that they thought were safe when they weren’t.
He admitted The side effect of the deferral rules is that they give the bank a captive source of capital. When a financial disaster strikes, recovering the deferred bonus fund amounts to a secured rights issue and, depending on the business model, this could be quite significant. Unfortunately, this is less beneficial in practice than in theory: by the time things have gotten so bad that management is actually considering it as an option, they’re probably already too bad to save anyway.
But the really important side effect is that deferrals and aggressive clawbacks act as sand in the gears of the job market for bankers. If someone has five years of bonds held, it is much more difficult and expensive to steal them. This is bad news for banks looking to hire or grow quickly, but great news for established ones. It probably also tends to reduce the strain on banker salary prices, particularly in bull markets.
London has historically been particularly draconian by global standards when it comes to deferral requirements. Therefore, making them more flexible is likely to make it a relatively more attractive labor market for employees, at the price of making it a little more expensive for employers.
The PRA consultation appears to recognize this: towards the end, during their cost/benefit analysis, they say that relaxing the rules “will facilitate the movement of senior staff to the UK, given previous industry commitments identified this requirement as an important deterrent for senior officials.” talent acquisition”.
Which might be true, but it’s an interesting take on the balance of power between labor and capital; one in which rainmakers can refuse to make labor moves that could harm them personally. The Bank of England appears to be betting that its competitiveness agenda is better served by doing good things for bankers than by doing good things for banks.