Can Higher Capital Standards Cause Lower Pay?

Includes: BAC, GS, MS
by: Felix Salmon

Robert Peston is skeptical that the Brown/Sarkozy/Merkel plan to restrict bankers’ pay is either workable or a good idea.

It’s pretty difficult to put a lid on pay in the wider financial industry, especially a globalised one.

Remuneration in finance is like a blancmange. If government and regulators squeeze one part, it will bubble up somewhere else.

If big banks are restricted in the cash rewards they can pay their top staff, they will reward them in other ways - with increased pension contributions perhaps, or cheap loans. Or they’ll pay a fortune to the best ones by hiring them on rolling short term contracts, to keep them off the official books.

He’s basically right — which is why the Europeans might be interested in the Geithner plan (warning: 14-page PDF) to impose higher capital standards on systemically-important banks.

The insight here, I think, is that the biggest banks — Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Merrill Lynch, etc — are the price-setters when it comes to banker remuneration. If they are socked with higher capital ratios, then their profitability will fall, their bankers will be paid less, and prevailing remuneration expectations in the industry as a whole will decline accordingly. Which would be a most welcome development.