Feb 28 2013

Bonus caps and financial transparency: a big step forwards

Posted by: Nick Shaxson in: Thoughts

Alongside a cap on bankers’ bonuses, a requirement for country by country reporting for banks.

Important stuff.

And here’s something I like very much, from the FT.

“While the terms of the deal are unlikely to change, if Mr Osborne holds out it will be the first time Britain has been outvoted on a financial services issue, a significant move overturning the informal convention that states are not overruled on law relating to their main national industry.

. . .

The reverberations of the cap will be felt beyond the banking sector. MEPs want the tougher version eventually to apply to hedge funds and investment managers, who are subject to existing bonus rules designed for banks.”

Very good. Too much finance is bad for your health, and this move by EU regulators will be bad for a handful of bankers, and good for the majority of Britain’s people.  I have for some time been promising a big paper on this subject, and it’s going to be ready in the next few weeks. I’ll look at these issues in great detail. And another article, before too long, looking (among other things) at hedge funds.

Oh, and something else, which I hope should get a whole lot of attention, Statesside, even sooner.

Please watch this space.

8 comments so far

La Chupacabra 2th February, 2013 12.12 pm


The vast majority of bonuses in London (and therefore in the EU) is paid by non-EU institutions, mostly by the dominant US investment banks and a handful of Swiss and Japanese institutions. Many of the receipients of bonuses are also not EU nationals, especially in senior management positions where these banks are run by Americans.

It will be extraordinarily easy for Citibank, JP Morgan or Goldman Sachs to (re-) locate their senior traders, dealmakers and managers to New York (or Connecticut) without any impact whatsoever on their operations.

In fact, since the overseas operations of EU-based institutions will be exempted from the bonus cap, Deutsche Bank, Barclays or BNP could also post their own senior contributors in New York or, better, Switzerland.

The EU, and especially the UK will be left short of the tax revenues from these bonuses. That will affect quite a few people who will have to make up for the shortfall.

This legislation will also leave the remaining EU-based financial sector at a significant competitive disadvantage, unless it massively raises its bankers’ fixed salaries. That however would make their cost base perilously inflexible, and make these institutions riskier in a downturn.

Nick Shaxson 3st March, 2013 8.26 am

Edouard, where have you been? I’ve been pining. OK
a) What will happen will be a the usual huffing and puffing ‘we will leave if you tax us or regulate us or cap our bonuses’ and then when their bluff is called only a tiny portion of them will do so. Words are easy to spout; ripping your children out of schools as a way of throwing your toys out of the pram is rather less likely.
b) what evidence is there that an over-inflated City is good for Britain? Just how have those trillions wheeling into and through the City made the UK as a whole any better off than, say, Germany, France, Canada, Sweden? Just how is an unbalanced economy good for the country? Rebalance it and you will get talented people moving away from unproductive rent-seeking activities (see e.g. here for a nice recent list http://www.interfluidity.com/v2/4043.html ) and towards occupations where they can add real value. Those tax payments that TheCityUK and City Corporation and its friends keep banging on about are a mirage, by the way. My forthcoming report will explain how. And I’m not talking about bailouts swamping tax payments, either. There’s an even more fundamental problem with their numbers. A smaller City and more balanced economy will mean higher tax revenues. You will of course cry that this isn’t possible, but it is. I’m afraid I can’t say any more at this stage than ‘watch this space.’

La Chupacabra 3st March, 2013 12.05 pm


Regarding a) you are seriously missing the trend here. Since 2008, banking employment in London has fallen by 30%, but it has remained flat in New York. The 2007/07 bonus pools in London and New York were roughly equivalent at $12-15 billion. For 2012, bonuses in New York will total $20 billion, versus $3 billion in London.

It is no longer just the case of a few people taking their kids out of school, etc. There is a powerful trend of global financial institutions, especially US investment banking firms which dominate the industry, to divert investment away form London either to New York or Asia, where both employment and compensation are up 30%.

Your comments under b) reflect a perfectly respectable political opinion that many on the left seem to take. I just hope that you have a solution to make up for the billions in bonuses (and taxes thereon) that are no longer paid in the UK but in Connecticut or Singapore.

Nick Shaxson 3th March, 2013 12.59 pm

Why is it ‘left wing’ to want a more balanced economy? Does that mean you have to support an unbalanced economy to be of the ‘right?’ And the tax and employment “contributions” put out by the City and so on are utterly bogus. Will publish on this before too long.

La Chupacabra 3th March, 2013 1.40 pm


There are two ways of re-balancing the economy. Bringing the losers up to the level of the winners, or doing the opposite, driving the winners down to the level of the losers.

If you were genuinely concerned about re-balancing the economy you would spend your entire time and energy helping to grow certain sectors such as manufacturing and non-financial services. Instead, it seems that you are focusing entirely on putting down one of the few sectors of the economy that is internationally competitive, but slowly leaving the country (as per the employment stats in my previous post).

I will watch this space for your report, hoping that it will be more than the usual irrelevant stuff about the City of London Corporation or some other parochial concern. It would be interesting if you looked into the economic contribution (not only tax) of global financial services companies with operations in London.

Nick Shaxson 3th March, 2013 8.33 am

Edouard, the trouble is that finance sucks so much life out of the other sectors. Such as the most talented people, who go to where the pay is best. So it isn’t as simple as you suggest. Everyone’s trying to make business work better, and they always have. Oversized finance (among other things) is preventing it happening. The many elements of this are complex, but it’s a simple and powerful principle. I don’t think even you would disagree with the point about talent.
Yes, and I will be looking into the tax contribution of the City in great detail. And this isn’t just about taxpayer subsidies set against tax contributions. There’s another whole (and untold) story here. I hope it will be ready in a few weeks, though I’ve been saying that for months.
But your earlier comment about relative size of bonus pools was interesting. I didn’t know that, thanks.

La Chupacabra 3th March, 2013 3.50 pm

Nick –

I have two challenges to your contention that the ‘City’ sucks so much life out of the rest of the British economy, especially by absorbing talent at the expense of the other secors.

The first is that the ‘City’ is a very small employment market measured by numbers. Banking headcout is around 300k – 350k, although this probably under-estimates the total since it fails to account for ‘City’-related support jobs (legal, accounting, operations, etc). Even if one doubles or trebbles the initial estimate, the total amounts to no more than 2% – 3% of total employment in the UK, which is just over 30m.

The second is that a significant proportion of non-UK nationals in the ‘City’ workforce. Estimates have floated around of c. 80k – 90k non-British nationals working in banking, but again this is very likely to under estimate the total. For reference, the IRS office in London processes in excess of 300k tax returns for UK-resident US citizens. These Americans don’t come to London for the weather or the quality of life; I strongly assume that many of them have senior positions in financial services.

There is considerable anecdotal evidence that the proportion of foreign nationals becomes dominant in more senior positions, one exception to this being law firms which still have a significant, although declining presence of UK nationals at the partners’ level. Therefore the overwhelming majority of British nationals in the ‘City’ work in support functions, where compensation is more or less aligned with sectors outside of financial services.

I would be interested to see how you adress these points in your upconming report. They are essential to understand the true impact of the ‘City’ on the UK economy.

Nick Shaxson 3th March, 2013 8.05 am

First of all, the City does suck the best talent out of the rest of the economy. I only have to look at the range of my university friends and their careers to get the picture. That’s indisputable. So a lot of foreigners come in: well that sucks other things out of the economy, such as housing. They bring benefits too, but these are gross benefits, not net ones. At the end of the day the net benefits are negative. You’ll see

Leave a comment