EU Bonus Cap Hasn’t Dampened Bankers’ Risk Appetite, Study Finds

The European Union’s cap on banker bonuses has failed to rein in risk-taking at Europe’s biggest banks, one of the purported objectives of the regulation, according to a study published by a leading German economic research institute on Tuesday.

(Bloomberg) — The European Union’s cap on banker bonuses has failed to rein in risk-taking at Europe’s biggest banks, one of the purported objectives of the regulation, according to a study published by a leading German economic research institute on Tuesday.

Restrictions on variable pay merely lead to banks increasing the fixed component of executives’ salaries, Michael Koetter, head of the financial markets department at Halle Institute for Economic Research, said in a statement. In some instances, the cap may encourage even riskier behavior by top managers if performance-related bonuses have less of an influence on their overall compensation, the authors suggest.

“The bonus cap misses its target,” said Koetter. “It should be abolished because until then it can tempt cautious bankers to take more and even too high risks.” At the same time, the cap hasn’t unduly hampered lenders’ ability to retain skilled managers, a key concern about regulation at the time, said the authors, who analyzsed the compensation of 130 board members at 45 major European banks.

Introduced in 2014 as part of a broader reform package, capping the bonuses of so-called material risk takers at twice their annual salary was intended to curb excessive risk-taking in the banking sector after the 2008 financial crisis. 

The scope of the study was limited to top executives at the banks, so it doesn’t capture any potential correlation between the risk appetite of employees below board level, such as individual traders or investment bankers, whose bonuses can sometimes dwarf those of executive board members.

The remuneration of all bankers, including those below board level, should be more transparent to increase accountability, Koetter said.

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