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If there’s one thing bankers love to do, it’s give themselves a title that makes them sound more like a banker than they actually are.
So while Goldman Sachs has “partners” who are not members of any partnership, all other investment banks have “managing directors” who are not members of the company’s board of directors. , often not managing anything. A bank’s “vice president” is quite far from the position of president. I used to work at a securities company, where the highest rank was “director.” It seemed like it was to remind all of us general directors that we weren’t fooling anyone.
Oddly enough, regulators are complicit in these status games. The EU has rules to identify “significant risk takers”, who are subject to stricter regulations on remuneration arrangements. However, they are very broadly drawn and basically, if you earn more than €500,000, you are considered to be one unless your employer proves otherwise.
Most banks don’t have to go to the trouble of making such an effort, so the industry is full of 20-odd “significant risk takers” whose actual ability to take risks with bank capital is probably more than enough to pick up a phishing link. It will be at its best when you click.
And now the Bank of England is trying to reverse this title inflation. Under the proposed new rules, only the top 0.3% of income earners in any company would be considered significant risk-takers, and even then, banks would be able to target companies that do not actually take risks, but instead take risks at their own discretion. can be excluded. Prior approval required.
It also includes some caveats that this is not just for high income traders. People who design risk management models are risk takers, even if they don’t think of themselves as such. But the main impact will be that many Little Leaguers will drop out of the category subject to the most stringent rules regarding bonus deferrals and clawbacks.
And the proposed rule changes go further than this, as the Bank of England currently believes that a seven-year deferral period is a bit too long, even for true material risk takers. It has been brought down to something close to the world standard.
This is good news for bankers, but less so for banks. (I have a bit of history here. When I was very young, I was involved in the early stages of bonus regulation. I have apologized for this in the past and will apologize again here.) Bonus deferral rules is one of many financial regulations whose side effects are more important than their stated purpose.
The stated objective is to align bankers’ incentives with the long-term financial stability of the bank. Perhaps this can be achieved, but it is not a very important objective. In any case, bankers’ incentives are pretty well aligned, since no one really benefits from listing an employer’s bankruptcy on a resume. And the incentive to take risks is less important. It’s very rare for a bank to blow up because someone intentionally took a big risk. Usually it explodes because someone did a lot of business that they thought was unsafe.
An acknowledged side effect of the deferral rule is that it gives banks a monopolistic source of capital. In the event of a financial crisis, recovering a deferred bonus pool is equivalent to a guaranteed rights issue, which can be very important depending on your business model. Unfortunately, this has less support in practice than in theory, so by the time things get bad enough for management to seriously consider it as an option, it’s probably too bad to be saved anyway. It should be .
But the really important side effect is that aggressive deferrals and clawbacks act as sand in the labor market wheel for bankers. If someone has five years worth of bonuses withheld, it will be much harder and more expensive to extract them. This is bad news for banks looking to hire or grow quickly, but good news for established banks. It also probably tends to ease price tensions on banker salaries, especially in bull markets.
Historically, London has been particularly strict by global standards regarding deferral requirements. Relaxing these regulations is therefore likely to result in a relatively more attractive labor market for employees, at the cost of some costs for employers.
The PRA consultation appears to have recognized this, and ultimately concluded during a cost-benefit analysis that relaxing the rules would “result in this requirement being a significant deterrent to senior officials in previous industry efforts.” “This will facilitate the movement of senior staff to the UK, given that it was recognized that this was the case.” Talent Acquisition.”
While that may be true, this is an interesting look at the balance of power between labor and capital. In this society, rainmakers can refuse to change jobs that might be detrimental to them personally. The Bank of England appears to be betting that its competitiveness agenda is better met by doing good for bankers than by doing good for banks.
