Struggle and Reform in European Banking

Written by Allen Lee ’16

Struggling European banks may have to deal with even more rigorous requirements

Struggling European banks may have to deal with even more rigorous requirements

On March 1st, 2013 shares of several big European banks dropped after Goldman Sachs analysts downgraded shares of Deutsche Bank. This drop was largely due to a Federal Reserve proposal that will be forcing foreign banks with $50 billion in worldwide assets that operate in the United States to maintain a local pool of extra capital and liquidity. Aimed at preventing another financial crisis, the Federal Reserve proposal will force foreign banks to reduce their capital reserves outside of the U.S and find alternative methods of raising capital.

Since the economic debacle five years ago, several European Banks have been struggling to retain their positions among top international competitors. Amongst the few European banks that are still considered powerhouses, Deutsche and Barclays both have announced spending reductions in forms of job cuts and bonus pool cutbacks. Barclays, for example, intends to remove 3700 jobs while Deutsche has reduced its bonus pool to 9% of revenues from 22% in 2006.

Both of these banks do have their strengths: Barclays an excellent sales and trading division, and Deutsche a large balance sheet with trades across multiple businesses. However, deeper changes in the industry are affecting the markets in which European banks excel. Those that earned profits through structuring derivatives to investors hedged against interest rates, commodity prices and currencies will be forced to pass on the service onto exchanges. The Federal Reserve policy is threatening the way in which European banks conduct international business.

Recently, Swiss voters approved some of the world’s toughest limits on executive pay in a referendum called the Minder Initiative. This initiative will allow the shareholders of Swiss companies to vote and determine the compensation of the bank’s top executives. In addition, this Minder Initiative will eliminate sign-on bonuses, severance packages, and incentives for completing mergers and acquisitions. Punishments for transgression of these new rules involve jail time. Such regulations could make Switzerland less attractive to multinational corporations.

With Swiss regulation heating up, UBS became the first big bank to give bankers bonuses in the form of bonds which would be cancelled if lenders failed to meet capital requirements. Analysts believe that Switzerland may become a role model for other banks that are under pressure from investors and regulations to more closely align pay with all stakeholders.

The Swiss are not the only Europeans who want to reduce executive pay as a backlash to the financial crisis. Members of the European Parliament last week struck a deal to ban bonuses that are more than twice bankers’ fixed pay that will take place if ratified by European Union countries and the full parliaments. Considerations also include forcing banks to defer up to 60% of executive bonuses to up to five years.

With European banks already struggling to cut costs under meager market conditions, these new set of policies serve only to threaten their remaining prominence. It is uncertain when and if all of these initiatives will be implemented. But if they are, It will ensure a difficult future for global banking.

Sources:

http://www.economist.com/news/business/21573169-switzerland-votes-curb-executive-pay-fixing-fat-cats

http://www.newstatesman.com/business/business/2013/02/ubs-shakes-pay-scheme

http://www.ft.com/intl/cms/s/0/47d6e2ae-6ee9-11e2-9ded-00144feab49a.html#axzz2MmAi2fP9

http://www.reuters.com/article/2013/01/21/us-reutersmagazine-davos-swiss-rich-idUSBRE90K0F420130121

http://www.bloomberg.com/news/2013-03-03/swiss-voters-set-limits-on-ceo-paychecks-sf1-projections.html

http://www.economist.com/news/finance-and-economics/21571912-europes-investment-banking-champions-face-tough-future-surviving-not-thriving

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