Seems obvious really

Britain\’s bankers have warned that tough new laws on pay and bonuses to be announced in Parliament this week could trigger an exodus of talented professionals and stifle economic growth.

There is a market in such people: whether there should be, whether it\’s justified, is another matter: but there is indeed a market there. If restrictions are placed upon what those market participants can earn then yes, there will be some change in behaviour.

At this point it doesn\’t atually matter whether the whole thing is driven by greed: that will still exist, if it is the cause, whatever the law says. Similarly, if it\’s monopoly power or rent seeking then this law won\’t change anything.

Further, there\’s a little wrinkle that few seem to have as yet noted:

It is understood that banks based outside Britain and within the EU, but with UK subsidiaries, will not be subject to the rules because they are not regulated by the FSA.

Some will say that the bankers won\’t leave: Zurich really isn\’t quite as fun a city as London. But they don\’t actually have to leave the country: all they need to do is move a building or two down the road. There are more than 400 banking licences in The City and there are, of course, a number which are EU based and thus not under the FSA remit. So that limitation on the ability of bankers to escape the rules is relaxed to a great extent.

Finally:

However, Lord Myners, the City minister, said bankers who were willing to take excessive risks and threaten the British economy were not welcome. He said: \”It might drive out people involved in excessively risky activities, but we don\’t want reckless people here.

\”It is very important that we have a viable and profitable, but also a stable, secure and de-risked financial centre.

Yes, we know what he means but it is still a very odd thing for him to say. The very point of a finan cial system (or at least one of the points) is to shuffle risk around. Futures and options exist to move risk from producers and consumers to speculators. Banks exist (at least their capital margins exist) to shield depositors from the risks of lending. A \”de-risked\” financial centre is no damn use to anyone for it is failing in its basic purpose: shouldering the risks that individuals do not want to take.

2 comments on “Seems obvious really

  1. Forgive my ignorance, but given that some banks have gone to the wall and others have laid off many of their staff, shouldn’t there now be a labour surplus in that market, with the concomitant drop in salaries on offer?

  2. But it is all a huge red herring. AIG financial products had an “ideal” incentive system. The problem however wasn’t the bonus structure, it was the very existance of AIG FP. It was writing re-insurance with no capital and was completely unregulated. UK banks overlent because the ‘system” allowed them to think they had no risk. Gordon Brown is running a class war anti bankers strategy as a last ditch tactic to get re-elected. It is disingenuous at best, and certainly counterproductive and dangerous

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