RBS revealed this morning that it made a loss of £5.2bn in 2012, claiming that it was beset with fines and regulatory sanctions, which ate away its cash. The losses are considerably worse than in 2011, when they were just £766m.
In a statement, the bank described 2012 as a ‘chastening’ year in which it was doing its best to ‘put right past mistakes’. It has been a messy year for the banking sector at large, with fines doled out by the FSA for PPI mis-selling, interest rate swap mis-selling, and the Libor rate-fixing scandal.
But critics were quick to point out this morning that RBS still spent more than £607m on bonuses for its bankers. Chief executive Stephen Hester pointed out that this figure is considerably lower than that of RBS’ competitors, but there are certainly questions to be asked about why a business making such woeful losses would feel the need to pay bonuses at all…
And as if in answer to RBS’ announcement (and the fact that its bonus pool cost more than 10% of the value of its losses), EU officials last night reached a provisional agreement for limiting the size of City bonuses to the value of one year’s salary – or two if shareholders are explicitly in agreement with it.
What it’s likely to mean for the financial sector is up for debate. On the one hand, many expect that banks will simply increase the salaries they offer so that bonuses can remain comparatively juicy. But on the other, salaries are a fixed cost base – something that banks prefer to keep low so that they can report larger profits.
So what will be the technical requirements if the EU’s plans go ahead? The European Parliament’s chief negotiator, Othmar Karas, said: ‘For the first time in the history of EU financial market regulation, we will cap bankers’ bonuses.
‘The essence is that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business – namely financing the real economy, that of small and medium-sized enterprises and jobs.’
It’s worth noting that Karas’ definition of banks’ ‘core business’ is probably not entirely aligned with the banks’ own definition. Many will see their investment arms (where the large bonuses tend to be paid out) as the more important element of their business. There is also a sense that the EU may be shooting itself in the foot with such a policy, as it stands to make Europe-based financial institutions less competitive than their American counterparts.
It could also damage the City of London relative to other EU financial centres - rivals in Frankfurt and Paris have long been jealous of London's dominance, especially with the amout of euro-clearing that gets done in the capital.
Mayor of London, Boris Johnson, has already attacked the new proposals. He said: 'This is possibly the most deluded measure to come from Europe since Diocletian tried to fix the price of groceries across the Roman Empire.'
Still, the new EU legislation has to get past ministers in the parliament, giving banks a couple of years to concoct ways of continuing to pay staff vast sums of money.