The EU's financial services chief has defended the right to cap City bankers' lavish bonuses in the face of a legal challenge from Britain over new pay rules.
Michel Barnier, the EU commissioner for internal markets, said he understood the UK's desire to protect its "golden goose" but insisted the limit is legal. Since the Treasury announced last month it would test the EU's new bonus rules at the European court of justice, George Osborne has been criticised for being too quick to defend the Tory party's allies in the City.
Speaking at the London School of Economics on Thursday, Barnier said: "The UK is not a special case in wanting to protect its golden goose. But neither is it in Europe's interest for the City of London to lose its place as one of the world's top financial centres. And it's not our intention."
Speaking to reporters afterwards, he said: "I know the rules of the game: all the rules which are agreed at EU level can be brought to the court of justice of the EU." Barnier added: "We continue to believe the legal basis which was chosen [for the bonus cap] was correct."
He said rules to limit bankers' bonuses were the only area where the UK had found itself isolated since the financial crisis, suggesting it was "perhaps not the best example" to have chosen.
The cap, which will come into force in January, restricts bonuses to 100% of bankers' base salaries, or up to 200% with explicit shareholder approval.
The Treasury argues that the new regime was rushed through without adequate evidence and could even make banks riskier if boards respond by increasing employees' base salaries, which cannot be clawed back later if the future of the bank is under threat.
A Treasury spokesman said: "Britain has been at the forefront of global reforms to make banking more responsible, including big reductions in upfront cash bonuses and linking rewards to long-term success. These latest EU rules on bonuses, rushed through without any assessment of their impact, will undermine all of this by pushing bankers' fixed pay up rather than down, which will make banks themselves riskier rather than safer."
Barnier was also keen to play down the risks of a damaging rift between eurozone member countries over the best way of preventing future banking crises.
He said a deal on a controversial proposed rescue scheme for banks – the single resolution mechanism, which is a key part of the EU's planned banking union – was "difficult, and possible" by the end of the year. However, he conceded it would not be up and running in time to deal with the legacy of underfunded banks.
The European Central Bank is shortly due to start combing through European banks' balance sheets in an asset quality review before subjecting them to stress tests to ascertain whether any should be required to shore up their finances.
But with no agreement yet on who would step in if a struggling bank's home state cannot afford to support it, analysts have warned that the stress tests could rattle markets and reignite the eurozone financial crisis.
Analysts at Credit Suisse said in a note on Thursday that the asset quality review "could prove to be the defining policy issue for the euro area next year", warning: "Ineffective and incompetent execution – an unfortunate feature of many political responses during the crisis – could bring about a resumption of financial turbulence and relapse back into recession."
Barnier conceded that there would need to be "backstops" if the review identified funding gaps that could not be filled by shareholders or governments."These exercises may throw up certain funding gaps. That is the point. We are shining a light into the dark corners," he said. "If banks are not able to raise capital in the markets – which could still be the case for a few – we will have a clear framework in place, with bail-in, and national and if necessary European backstops."
But asked whether that meant using the eurozone bailout fund, the European stability mechanism, to rescue banks – an idea that is anathema to Germany – he said: "There's a whole discussion whichministers are having right now between themselves. The commission doesn't sit around that table: the ESM is an intergovernmental project."
Goldman Sachs cuts wages bill
Goldman Sachs slashed its wage bill by 35% in the third quarter as bond-trading revenue plunged, an unusual step that signals the bank's concern about performance for the rest of the year. Revenue from trading fixed-income, currency and commodity products for clients, one of the bank's biggest businesses, tumbled 44% in the quarter, Goldman reported on Thursday.
Excluding an accounting adjustment, the drop was 47%, a much sharper decline than those posted by rivals. "Goldman showed that they are also mortal," said Michael Holland, founder of Holland & Co, which owns financial stocks but does not own Goldman shares.
Goldman responded to the weaker revenue by setting aside less money to pay employees during the quarter - $2.4bn, compared with $3.7bn in the same quarter last year. That amounted to 35% of its revenue in the quarter, while the bank's target is usually closer to 43%.
The firm sometimes cuts the money it sets aside for pay in a quarter, but it usually does so in the fourth quarter, when there is no hope of earning extra revenue for the year. Doing so in the third quarter signals that it does not expect a big rebound in the fourth quarter. ReutersThis article was written by Heather Stewart, for The Guardian on Thursday 17th October 2013 21.51 Europe/London
guardian.co.uk © Guardian News and Media Limited 2010