Finance

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Bank bonus season is looming again, and while there will certainly be chatter about individual bankers’ paychecks, the pools are also a useful scorecard to determine which firms are winning the global banking game.

By that measure, JPMorgan Chase appears to be in the lead simply by keeping its bonus pool level this year, according to Hugh Son of Bloomberg News. This is a coup for the biggest U.S. bank, which will inevitably retain and attract talent as its European peers race to cut compensation.

Sweet Payday
Wall Street bonus pools have been increasing over the past few years.
Source: New York State Department of Labor, Office of State Comptroller, Bloomberg

On Wall Street, end-of-the-year bonus pools are highly significant. In addition to their impact on individual bank accounts, they are an indicator of institutional performance and signal to employees whether banks are poised to grow or shrink. But in this case, they also tell a deeper story about risk and how difficult it is to measure. 

To get a sense of the boldness of JPMorgan’s decision to keep overall bonuses roughly the same as in 2014, just look at its European peers. Credit Suisse may cut its bonus pool by as much as 60 percent, the London-based Sunday Times reported, while Deutsche Bank may cut bonuses at its investment bank by almost a third, Bloomberg News reported last month.

While some analysts attribute European banking woes to the region’s steadily tightening regulations, the root cause is far deeper. The European banks are actually riskier and worse off, at least according to the amount of failing loans on their books and the fragility of the region’s economy.

European banks have about 1 trillion euros of nonperforming loans on their balance sheets, equal to about 5.6 percent of their total exposure, according to the European Banking Authority. That’s almost twice the proportion of bad debt on balance sheets at U.S. banks.

Banking Burden
European banks are struggling under the weight of the soured loans on their books.
Source: European Central Bank, Bloomberg

To give a sense of just how big that European pile of bad debt is, it’s almost equal to the annual economic output of Mexico. And it’s an enormous burden for banks in the region, curtailing their ability to make new loans and eating into profitability.

Part of this stems from their reluctance to sell off and write down soured loans as quickly as U.S. banks did in the immediate aftermath of the 2008 financial crisis. European banks are also contending with a stubbornly slow regional economy, one that’s barely picking up even with a negative deposit rate and more stimulus to come.

All of these external factors end up getting packed into the much more basic matter of how much bankers get paid. European bankers are the canaries in this particular coal mine, and the outlook is grim.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net