EU bonus caps would make banks more likely to go bust - City of London mayor
Putting limits on the amounts awarded in bank bonuses would make it more likely that banks will go bust, the Lord Mayor of the City of London has said.
Alderman Alan Yarrow told the Irish Independent that capping bonuses would put more pressure on a bank's basic overheads. From next year the EU plans to limit the amounts bankers can receive in bonuses to no more than twice their fixed pay, or double that with shareholder approval.
Last month the UK dropped a legal challenge to the plan after an adviser to the European Court of Justice said the challenge was unlikely to succeed.
"The initial point of the bonus was actually to keep the fixed overheads of the organisation down," Alderman Yarrow said.
"All these businesses tend to be in cyclical industries, and they want to keep the fixed overheads down so that when they went through a recession they didn't lose the quality staff," he added.
"It was to make sure that the individual was a profit participant…what subsequently happened was that bonuses became almost guaranteed, they became part of the fixed structure.
"I think it's been mis-sold this bonus thing. It's supposed to be variable pay, and the variable pay is there to make sure the break-even point isn't hit when the market goes into recession.
Mr Yarrow believes that "clawback" rules allowing banks to reclaim bonuses from bankers in certain circumstances are a good idea. The Bank of England is to introduce tough clawback rules from January 1."I think what got lost in the wash on the way through the process of big bang was that a lot of these businesses were involved in partnerships, and in a partnership, you as a capital partner were liable to your bootlaces. If something went wrong you lost the lot.
"But as soon as it became companies where they had company guarantees and so on, the individual didn't suffer."
Yesterday Alderman Yarrow met the Taoiseach in Dublin as part of a visit designed to launch a dialogue between the City of London and the IFSC on financial services.
"The financial centres of the Ireland and the UK have different, yet complimentary, strengths. Each reinforces the other. For example there are some exciting financial technology startups emerging in Ireland which could benefit from the City of London as a potential source of finance," Alderman Yarrow said.
The UK is the largest market by value for exports of Irish financial software.