In meetings in London to set the agenda for the Group of 20 economic meeting in Pittsburgh later this month, Treasury Secretary Tim Geithner scored a major win over Europeans with rival financial reform plans.
Backed by British officials, the US officials set the official agenda to focus on capital requirements at banks rather than bankers bonuses. The bonus provisions that were agreed were far more watered down than had been wanted by French and German officials.
The declaration by the officials that banks should hold more capital and leverage should be capped was perhaps the most surprising thing to come out of the meetings. The Europeans, whose banks are far more leveraged than the US banks, were expected to resist this measure. Geithner has made better capital requirements the focus of his plan for financial reforms.
In Europe there is a wrong-headed but widespread belief that banker bonuses were the primary cause of the financial crisis. They believe that bankers ramped up risk and sought short term gains in order to increase their bonus. As a result, many European politicians are seeking to reign in banker pay. They had wanted total pay caps, with punitive taxes applied to any bonus above the cap.
The US, which adopted similar measures for CEO pay last decade only to find they were easily skirted, has taken a different view. It has quietly opposed tax penalties for bonuses and emphasised capitalisation reform instead. This view seems rooted in the idea that the crisis was not brought on by the compensation model as much as by the thin levels of capital and high leverage that left the banks vulnerable.
U.K. Treasury chief Alistair Darling said it would have been a “big mistake” to focus too much effort at the weekend’s meeting on bank bonuses. He said that excessive bonuses are “as much a symptom of the problems that we have as a cause” and that it is crucial to also strike agreements to raise capital standards and ensure that firms and regulators have plans in place if a bank fails.
Geithner proposed that banks should hold more capital, and that capital should be higher quality. This will likely require many banks to raise more equity. At the meetings, officials agreed that the total leverage–the ratio of equity to total assets–should be capped.
The bonus provisions adopted include requiring clawbacks on bonuses that are shortly followed by losses at the bank, as well as deferrals for bonuses paid in stock.
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