The European Union’s pending cap on bankers’ bonuses is unlikely to do much to significantly alter European trading banks’ cost structure, says Fitch Ratings in a new report.
The credit rating agency says that recent results from German regulators’ review of bankers’ bonuses highlights the fact that they have made “limited progress” in restricting the bonuses of top managers ahead of new rules that take effect this year. It says that the review found deficiencies at most banks, and that some are still exceeding the maximum bonuses allowed under the new rules.
“The finding that many German banks were not properly identifying ‘material risk-takers’ highlights the challenges in interpreting and applying the pay restrictions,” it notes, adding that the inconsistent application of risk criteria could result in some banks getting around the bonus cap. Others may be getting around the cap by increasing salaries, or using additional share awards and allowances that do not count as salary or bonuses.
As a result, it concludes that it’s unlikely that total compensation costs and benefits will fall significantly as a result of the bonus cap. “Compensation costs of five large European global trading and universal trading banks were 41% of net revenues on average for the first nine months of 2013, and we do not expect the new rules that come into effect this year to substantially reduce this ratio,” it says.
Fitch suggests that, in the long term, the greater impact on overall compensation costs will come from an ever-increasing focus on costs, and the push to exit low-margin businesses. “Evolving regulations around risk-weighted assets, leverage and liquidity are determining which operations will continue to achieve appropriate returns in a more punitive economic environment, and trading banks are withdrawing from selected businesses as a result,” it says.