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26 Aug 2009 15:22
G20 finance ministers will discuss next week how to curb excessive bankers’ pay, but the group of leading nations is not expected to heed a French call to “cap and tax” bonuses, officials and analysts said.
There is public anger in many countries at the return of big bonuses, particularly at banks that needed shoring up with taxpayer money at a time of rising unemployment and difficulties faced by businesses in obtaining loans.
However, the scope of steps to curb bankers’ bonuses may be limited by the difficulty of drafting watertight rules and also by fears that countries taking tough action may suffer a competitive disadvantage versus other financial centres.
G20 finance ministers meet in London on September 4 and 5 to prepare the ground for a summit of the group’s leaders in the United States city of Pittsburgh on September 24 and 25.
Germany and France say they want a G20 deal on tougher rules governing bonuses to stop a return to “business as usual”.
“The French president [Nicolas Sarkozy] will come to Berlin next Monday on a working visit to prepare the G20 meeting,” German Chancellor Angela Merkel said in an interview on N24 television on Wednesday.
“Bonuses will be a central theme, because it is really annoying that already today bonuses are being dealt with in some banks almost exactly as they were before,” Merkel said.
G20 host Britain confirmed that bank pay will be on the finance ministers’ agenda.
“The [UK] chancellor has been clear that the short-term bonus culture must change,” a Treasury spokesperson said.
Sarkozy told French bankers on Tuesday he was “scandalised” that lessons from the credit crunch were being forgotten so easily.
French banks would be required to defer two-thirds of bonuses paid to traders over three years and make a third of the payout in bank stock rather than cash, Sarkozy said.
Michel Camdessus, former head of the International Monetary Fund, will monitor bonuses received by banks in receipt of state aid—mirroring US moves to appoint a “pay tsar”.
Policymakers have blamed generous bonuses for encouraging excessive short-term risk taking and there is global consensus already that pay should be defined over the longer term.
There will be global backing for some of the new French rules simply because they largely copy what the G20, European Union and countries like Britain have already agreed on, such as the deferral of parts of a bonus and the mix of cash and shares.
Bonus “tobin” tax?
Sarkozy wants the G20 to go a step further than in its April principles and wants financial centres to cap the largest bonuses, create a tax on bonus payments in all financial centres that would fund deposit guarantees, and limit total bonus payments to a proportion of revenues devoted to investment.
Sarkozy cautioned that any caps and taxes would only be introduced in France if its G20 partners followed suit to avoid an exodus of traders.
Officials involved in the G20 said privately the group is not expected to back Sarkozy’s “cap and tax” proposals but may stress how bonuses should be structured.
“I don’t think you are going to get a big ‘buy in’ on the more extreme proposals for capping bonuses,” added Richard Reid, director of research at the International Centre for Financial Regulation.
Previous attempts to introduce a global levy, such as the “Tobin Tax” on cross-border currency trades, got nowhere.
“All that Sarkozy is doing is getting the opportunity to pander to the domestic electorate while sending a coded message to French bankers saying ‘don’t worry’,” said Simon Gleeson, a financial services partner at Clifford Chance lawfirm.
“It’s impossible to see how proposals like these could be implemented in practice unless you get really draconian laws,” Gleeson said.
Nicolas Veron, research fellow at Brussels think tank Bruegel, said Sarkozy will have some political impact globally though the policy itself faces an uphill struggle.
“You need to put some defined legal categories on what pay you are going to regulate and the possibilities for firms to go round them is almost infinite,” Veron said.
Political pressure is already shaping how banks approach pay.
Citigroup, Bank of America and AIG are forging new employment contracts that let them void compensation agreements if they are challenged by the US government, a person familiar with some recent contracts told Reuters.
French bank BNP Paribas agreed on Tuesday to implement Sarkozy’s proposals immediately and halve its bonus pot to €500-million.—Reuters
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