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In a paper published shortly after the financial crisis, two US-based academics, Thomas Philippon and Ariell Reshef, sought to show how financial deregulation leads to massive spikes in bankers’ pay.
The idea was that when the rules were softened or pulled down altogether, lots of clever people were sucked into finance who turned their minds to exploiting all the opportunities offered by the financial innovation this laxity made possible. Revenues soared, allowing pay to rocket too.
The pair drew parallels between the long financial boom that embellished America’s gilded age up to 1929, and the more recent upsurge that ended in 2008.
The resulting spikes in income were eerily similar. Pay was 1.6 times higher in finance than in other professions in 1928 on the eve of the Wall Street crash; the same level it reached the best part of a century later.
This all changed with the re-regulation that followed 1929. New rules came in, limiting the scope for innovation. Profits fell, and by the 1950s, bankers were paid little more than the other professions. The entrepreneurs departed, and finance became a profession for the slightly dull and conscientious. It all raised a tantalising question: could finance become a boring and ordinarily remunerated industry again?
Nearly a decade on from the crisis, there is no simple answer. True, pay overall has come down by a quarter or more since 2008, and some of the most dubious products and practices have diminished. But innovation has hardly disappeared, and pay has recently started creeping up again, although quite how strong this trend is depends on which side of the Atlantic you happen to be sitting.
Last month the New York state comptroller reported approvingly (more taxes!) that Wall Street bonuses rose back to levels last seen in 2007 — at least in nominal terms. They went up last year by 17 per cent to $31bn in total, or an average of $184,200 per worker. That may be a fifth below the pre-crisis peak in real terms. But it’s still more than triple the median household income of $59,039.
Europe, meanwhile, presents a less exuberant picture. Pay has been going up to be sure: for instance Deutsche Bank’s bonus pool more than quadrupled last year to €2.2bn, and Barclays also raised wages at its investment bank.
So while US wages may hold up, or even recover somewhat, pay at European banks seems more likely to slide further as the continent moves perforce towards a more vanilla financial system. That’s bad news for brainy European bankers as it reduces their opportunity to bank some stratospheric earnings. But, more happily for the rest of us, it makes the system less prone to risky innovation.
What remains then is for European banks to bite the bullet, and either cut pay further or exit business lines completely. Deutsche has started, last week announcing big cuts to its investment bank.
But Barclays and Credit Suisse still seem less sure where to jump. Both face hostile attention from activist investors. While excessive pay continues, watch this space.
Full article on Financial Times (subscription required)