March 01, 2013

Why must UK say “No!” to EU on a bonuses cap, without presenting any decent counterproposals?

Sir, I refer to your editorial “Diplomatic fallout from EU bonus cap” March 1. 

Solving the absolutely valid concerns about excessive bonuses paid in banks, by means of capping the bonuses to staff to a maximum percentage of their salaries as the European Parliament proposes, only introduces another distortion… on the road to overmedication 

What I would suggest doing, and thought it might seem to be similar regulatory distortions to you, is in fact reducing other distortions that influence the bonuses paid. 

First, since tax-deductibility is in itself a source of distortion that favors big bonuses, I would limit how much remuneration a banker can get in order for it to be a tax deductable expense, 

And secondly, I would eliminate those extremely low capital requirements for banks for exposures to what is considered as infallible, since these impede the existence of sufficient shareholder´s compensation requirements which can keep the bonuses in check. 

I would of course also do the latter as you know, because the minimalistic capital requirement for what is “safe” and which thereby discriminate what is perceived as “risky” is in fact, on its own, the greatest source of distortions which makes it completely impossible for banks to help allocate economic resources efficiently. 

Why must UK say “No!” to EU on a bonuses cap, without presenting any decent counterproposals?