(Bloomberg Opinion) -- Europe should let the good times roll.
Investment banking revenue has soared in recent quarters. So much so that regulators at the European Central Bank will be hard pressed to justify the limits on compensation they’ve had in place since 2020, when the pandemic was at its height. Indeed, the recent rises in junior pay across U.S. investment banks are a clear signal the finance job market is heating up. Keeping the lid on the bonus pot will be the toughest struggle for EU-regulated banks in their competition with a buoyant Wall Street. The ECB needs to become more practical — and commercial — in its zeal to protect the economy.
With an increasingly successful vaccine rollout, and the 800 billion-euro ($940 billion) NextGeneration recovery fund about to kick in, the EU's pandemic response has largely saved the day. So it is time for the regulator to let go: The situation is no longer extreme so its restrictions should cease to be as well. This is a drum I have been banging on for some time. But the ECB is still sticking with reiterating “supervisory expectation that banks exercise extreme moderation on variable remuneration.”
Both BNP Paribas SA and Deutsche Bank AG were forced to revise their 2020 compensation plans lower after a stiff wigging from the regulator but they will suffer a real competitive disadvantage if this persists into the 2021 round. Not all banks are fit enough to be allowed to return to normal but this should not limit the majority that are being held back unnecessarily. It’s time for some carrot, not just all stick. The mood music has changed — as evidenced by junior bankers' base salaries inexorably on the rise. But that’s just the lowest and most visible part of the inverted triangle that is financial sector pay. It will be magnified for the rainmakers.
The ultra-cautious ECB did undo some of the shackles on July 23, allowing the distribution of dividends, as U.S. banks have been doing since July. But these only take effect from the fourth quarter. The EU bank regulator might soon permit stock buybacks but it is dragging its heels, demanding “extreme prudence.” Spanish lender Banco Bilbao Vizcaya Argentaria SA already has plans for a capital return to shareholders if allowed. Several other large European banks are right behind them in the queue.
Europe’s predicament is compounded because the U.K. is thinking of scrapping its cap on bonuses, now limited to double base salary. The EU-based banks are still largely bound by a bonus restricted to the equivalent of base salary, which is increasingly unmanageable if that remuneration isn’t allowed to shoot up. Brussels risks something like an own goal if European bankers and promising neophytes quietly slip into London in search of greater rewards. The only thing holding back the U.K. may be the ongoing post-Brexit talks and the third-rail of letting banker pay soar.
And then there’s America. Goldman Sachs Group Inc. added $3.5 billion to its bonus pot following a banner first half. And it was the last of the bulge bracket investment banks to play catch-up in the starting salary game. But then Goldman has long poached the brightest and best of the junior analysts from other smaller and less prestigious firms after they have kindly trained them at great expense. It can pick and choose — and those European kids are there for the taking.
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Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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