In London Bonuses Fall, Appetite for Risk Remains

Photographer: Chris Ratcliffe/Bloomberg

Glum times in the City

This was the year of missing bonuses. Though investment banks had largely recovered from the financial crisis, bankers’ paychecks didn’t. Now that the bond market has been in overdrive for a year, surely the next round of bonuses will be better for bankers?

Not in London, as Bloomberg reports today. Despite the upswing in banking, bonus pools there could fall as much as 20 percent. Meanwhile, many of the bonuses that are handed out will be locked up in stock and deferred compensation plans that delay payments for three years. In the United States, meanwhile, bonuses should hold steady–still not a return to the glory days.

Europe has been particularly focused on holding down bank bonuses. Don’t count on government fiat working here forever. Whether by moving jobs to the U.S. and Hong Kong or shifting around other operations, banks will find ways to pay bankers when profits are high.

A deeper structural change here is that post-crisis reforms may dampen bank profits and bonuses for years. Take a look at the chart to the right, from a presentation by Bernstein Research’s Brad Hintz . It tracks leverage in investment banks’ trading operations, which is now down to the levels of 1990.

(Hintz’s full data-rich presentation, “Is the Investment Banking Business Model Broken?” is well worth a look.

Squeezing leverage out of the system was a major aim of post-crisis financial reform. One question worth asking here is whether new financial instruments will emerge in the next years that will let banks ratchet up risk while staying within the capital levels mandated by post-crisis rules. Whatever diet banks may be on now, there’s an appetite for risk that remains unsated.

A version of this post appeared earlier in the Market Now newsletter. Click here to register at and subscribe to The Market Now daily email.

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