The fireworks that welcomed 2011 unfortunately heralded the birth of a year that is to be marked by the implementation of more burdensome government regulations enacted in the wake of the financial crisis.
European bank regulators announced late last year new restrictions governing the way in which banks may pay their employees, stipulating that no more than 30% of bonuses can be paid in cash. The new regulations, released by the Committee of European Banking Supervisors, are without equal in the developed world, and will supplement existing regulations in Germany which already limit four German lenders, Commerzbank AG, Hypo Real Estate Holding AG, Areal Bank AG, and WestLB AG, from paying staff more than €500,000 annually. The regulations came into effect on January 1.
Instead of helping Germany, however, the regulations represent a craven appeasement of misguided populist sentiment that will ultimately hurt Europeans and the German economy. The most immediate result of the new regulations, which do not exist in major financial centers in North America, the Middle East, and Asia, is an offshore migration of financial services from European cities such as Frankfurt and London.
Not only will this weaken the financial infrastructure in Europe, it is also doubtful that the regulations will do anything to help improve financial stability on the continent. The Economist reports that the restrictions on bonuses, which are performance based, will cause a movement towards larger non-performance based remuneration, which may reduce the incentives of employees to help protect individuals and firms from risky investments. Furthermore, magazine reports that banks, which now have higher fixed costs, will be “less able to respond to revenue volatility,” contributing to a riskier banking environment.
Like many other government interventions into private sector decision-making, the new banking restrictions alter incentive structures in a way that is potentially harmful for the wider society, and may force the emigration of financial professionals, along with the services, secondary jobs, and tax revenue that they provide, from Germany. Read more about the Berlin Manhattan Institute.