London is losing out from EU diktats
SO there you are. The European Parliament has just voted to locate the planned new EU agencies to regulate banks, markets and insurers in Frankfurt, in a massive blow to London. This provision may yet be eliminated from the final directive but is an ominous sign. What won’t change are the new rules on bonuses: these will limit the share of awards that can be paid out immediately and promote deferred, equity-based compensation. London’s banks already do this but investment firms will also be forced to comply; future legislation will ensure hedge funds are also hit.
The trouble is that this won’t really achieve much (other than gradually chasing away activity and jobs to countries outside the EU). Some financiers were incentivised according to excessively short-term targets. But Bear Sterns and Lehman had been diligent in promoting employee share ownership – around 30 per cent of the total equity in each case – in a bid to encourage long-termism. It wasn’t a great success. Even the FSA’s Lord Turner said as much in his Report: “Many top managers of financial firms which suffered huge losses during the financial crisis (and, in the case of Lehman, complete failure), were very large shareholders in their firms, and in several cases had voluntarily chosen to invest large proportions of cash bonuses in their firms’ equity. But these large stakes in the long-term profitability and stability of their firms did not seem to result in any greater awareness of or concerns about the risks the firms were running.” And at the Lord Mayor’s banquet last year he said: “It is possible to overstate the importance of bonus structures in the origins of the crisis: they were, I believe, much less important than huge failures in capital adequacy and liquidity regulation.”
The bankers destroyed their banks because they made errors and faulty judgments on a colossal scale (for which they deserved to be wiped out) – not because they were deliberately betting the bank in a bid to make a quick buck. They were mistaken, not evil or (in the main) deliberately reckless. Consider the subsidiary of American International Group responsible for using credit default swaps to insure sub-prime mortgages. Traders had to defer around half of their pay into company shares: their interests were aligned with that of the firm, the kind of “good practice” the EU is promoting. I have yet to find any convincing academic evidence that bonuses played anything other than a tangential role (at worst) in the crisis.
The massive power grab by Brussels is a scandal – but Britain’s lame response has been even more depressing. This is in stark contrast to Germany. Five eminent academics have filed a legal complaint against the €60bn Eurozone credit facility and the €440bn Eurozone aid package. The complaint plausibly identifies several infractions against the German Constitution and EU Treaties.
It is excellent news, therefore, that Bill Cash, the Tory MP for Stone and veteran Eurorealist, has been elected as the new chairman of the House of Commons’ European Scrutiny Committee. His legal training – he is a distinguished constitutional scholar – will come in handy while analysing the deluge of new rules emanating from Brussels. What we also need – and perhaps Cash could play a role in commissioning this – is a proper cost-benefit analysis of what Britain gains (or loses) from EU membership. We may be shocked by the findings.
allister.heath@cityam.com