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EU Bonus Cap Won’t ‘Substantially’ Cut Banks’ Costs, Fitch Says

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Jan. 23 (Bloomberg) -- European Union restrictions on bonuses probably won’t reduce compensation costs at banks in the region, Fitch Ratings said.

Compensation expenses at the five largest European banks was 41 percent of net revenue on average in the first nine months of 2013 and the ratio probably won’t drop “substantially” as a result of measures that start this year, Fitch said in a statement today.

The EU agreed last year on rules that would limit bankers’ bonuses to twice their salary, a move lawmakers said would curb irresponsible risk-taking following the 2008 financial crisis. The European Banking Authority last month advised the European Commission to allow waivers to some employees earning more than 500,000 euros ($682,000) a year, three months after the U.K. government challenged the caps at the EU’s highest court.

“The greater impact on overall compensation costs in the long term is likely to stem from the ever-increasing focus on costs and exiting low-margin businesses,” Fitch said. “Evolving regulations around risk-weighted assets, leverage and liquidity are determining which operations will continue to achieve appropriate returns in a more punitive economic environment.”

Fitch said results from Germany’s Bafin, the country’s top banking regulator, last week showed banks have made “limited progress” restricting bonuses of senior managers before the new rules.

German banks often used the wrong parameters in rewarding bonuses to top executives and risk-takers in 2012 and didn’t always comply with financial rules, the regulator said on Jan 13. Bafin, which reviewed the way 15 banks paid salaries and bonuses in 2012, found that the lenders failed to adequately identify which of their employees were risk-takers, Raimund Roeseler, head of banking supervision at the watchdog, told reporters in Bonn.

To contact the reporter on this story: Ambereen Choudhury in London at achoudhury@bloomberg.net

To contact the editor responsible for this story: Keith Campbell at k.campbell@bloomberg.net

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