Financial Regulation

Europe's Banker Bonus Limits Probably Won't Actually Limit Banker Pay

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The University of Chicago's Luigi Zingales has a smart post on what we know about how banker pay affects risky behavior—not all that much—and the futility of new European restrictions on banker bonuses. As Zingales points out, there's no clear causal effect between higher banker pay and greater risk taking. Despite this, however, the European parliament recently set up a number of rules regarding how bankers bonuses can be structured each year, including a strict limit to how much of each year's bonus can be paid in cash. But as Zingales says, this restriction isn't likely to be all that effective:

The main shortcoming is that these restrictions can be circumvented easily, since they apply only to bonuses, whereas banks maintain discretion over the mix between salary and bonus. Currently, bank managers receive their bonuses at the beginning of each year, with the level based on their individual performance during the previous year. It would be very easy to transform last year's bonus, based on last year's performance, into this year's salary. The salary, which can be paid entirely in cash, will be renegotiated every year, thereby skirting all the regulatory restrictions.

The end result—that bankers simply end up having to jump through a series of regulatory hoops in order to get the same result—is government regulation that's both unnecessary and ineffective.

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  1. LOL, of course it wont, they will always find ways around it.

    Lou
    http://www.total-privacy.cz.tc

    1. HA! I always suspected that no-talent, mop-headed douche was an anono-bot!

    2. This is anon bot’s best post ever. He nailed it, and he’s posting as Justin Beiber.

  2. I’m all for tweaking corporate law to empower holders relative to management, thereby addressing the agent principal problem, but when the day is done if a company wants to pay management some bonus or such they should be free to do so…

    1. Stop trying to make people believe in elves and left-libertarians, MNG! It’s not going to work!

    2. These guys aren’t necessarily management anyway.

  3. “OK, look, this *isn’t* a BONUS, got that? It’s well, just some walking around dough…”
    The government can’t help it; it’s always slamming the door the horses went through yesterday, not the one they’ll use tomorrow.

    1. Moreover, the wayward horse gets to “suggest” how he’s to be kept in his stall next time.

  4. Regulations usually just add complexity and therefore cost to the business being regulated. Which of course can only be paid by the customers. So they are hitting bank customers with additional expenses right in the middle of a deep-down economy.

    These public sector types are pretty fucking smart.

  5. If they stopped bailing the bankers out and stopped giving them special privileges and deals concerning access to low interest money from the central bank there would be no need to limit their income.

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