Matthew Lynn Matthew Lynn

It’s time to scrap the cap on bankers’ bonuses

(Credit: Getty images)

Critics say that scrapping the cap on bankers’ bonus will encourage a return to excessive risk taking. It will provoke retaliation from the European Union, they warn. And perhaps, worst of all, it could prove fatal politically, rewarding a few rich Tory friends while the rest of the country struggles with the cost-of-living crisis. Chancellor Kwasi Kwarteng will get lots of criticism if, as predicted, he does decide to bin the cap in his upcoming financial statement. Even so, he should ignore the naysayers.

It will certainly be a controversial move. The controls on City bonuses were imposed right across the EU in the wake of the crash of 2008/2009. These rules limit the amount that traders and bankers can earn in relation to their basic salaries. Behind it was the idea that bonuses had created a culture of excessive risk-taking that led to the crash. In fairness, there was an element of truth in that suggestion, even if it was hard not to suspect there was also an element of envy involved as well. But whatever the merits of that decision, the cap has long since outlived its purpose. Here’s why.

All the cap does is make it harder for them to reward real talent

First, it is hardly relevant any more. If anything the banks have become too cautious, and reluctant to invest, and they have such strict solvency and stress tests that it is unlikely they will return to the wild bets on housing or any other asset. All the cap does is make it harder for them to reward real talent. 

Next, allowing better bonuses will vastly improve the competitiveness of the City. The EU will keep its cap in place, and that will make London an even more attractive place to base a financial institution than it already is.

Already a subscriber? Log in

Keep reading with a free trial

Subscribe and get your first month of online and app access for free. After that it’s just £1 a week.

There’s no commitment, you can cancel any time.

Or

Unlock more articles

REGISTER

Comments

Don't miss out

Join the conversation with other Spectator readers. Subscribe to leave a comment.

Already a subscriber? Log in