Switzerland to introduce strict restrictions on executive pay

Michel Barnier, European Commissioner for Internal Market and Services, speaking recently during the 11^th Annual Conference of the European Financial Services, revealed his frustrating experience from this years’ Davos gathering. On that occasion Barnier had the opportunity to meet the leaders of the world financial industry. Talking with them, he said he understood they are considering that the financial crisis is over and they are demanding from market regulators, to withdraw the few remaining rules and controls. Naturally he was astonished to hear that, because he said he believes that the devastating repercussions of the last financial crisis are still here, haunting the real economy with recession and growing unemployment.  Barnier added that more financial regulations and controls are obviously needed, if we want to avoid more financial crisis. He stressed that, if we let things as they were four years ago, the same causes will produce the same results. In short he concluded that the opinion of the leaders of the world financial industry is wrong on many accounts. The reasons why the leaders of the major financial firms want to return to the previous market regime, are obviously connected with their ability to continue spinning around the world other peoples’ money. The results of that arrangement are now tantalising the real people and the real businesses. At the same time banks are receiving huge subsidies from taxpayers and central banks, while the few additional restrictions imposed on them during the last two years are not enough to prevent all those financial vultures, from repeating what they did four years ago. The truth is however that bit by bit the European politicians, under the pressures of the public opinion, are planning more rules and restrictions on the banking industry. As a matter of fact our modern societies strive to find ways and means to ‘emancipate’ themselves from the dependency on the banking sector. This is not an easy task and is being developed in two fronts. In the first place it’s the efforts to impose more capital adequacy obligations to banks, so as they are not able to use many times their depositors money for their own risky bets. In the second place one after the other the developed western countries introduce restrictions on bankers’ bonuses, so as to reduce the incentives for more and more risk taking. The latest good news, in the path to bring again the financial industry under the control of society, came from an unexpected source. It’s the Swiss people who last weekend voted in a referendum overwhelmingly in favour of imposing the world’s strictest controls on executive pay. The results were almost 70% in favour of the restrictions and the same tendency prevailed in all the 26 cantons. Naturally the banking community of this country came out with arguments for the contrary, threatening that the country’s competitiveness will be harmed. The Swiss people however know very well that the largest and most ‘competitive’ bank of their country, the UBS, had to be bailout by their government with their money. How competitive can be a bank, if its needs huge government subsidies to survive? Or to put it differently, how competitive can be a bank if it cannot perform its main duty, which is to protect its depositors’ money? We are not talking here about any bank. It’s the ‘mighty’ UBS. On the same line of events last week in Brussels a ground-breaking agreement was struck between the European Parliament and the Irish Presidency of the Council of the European Union, to cap bankers’ bonuses at their annual salaries. The new rule foresees an exemption for bankers’ bonuses to exceed one annual salary and reach the highest allowed maximum of two salaries, only if this is authorised by holders of at least half of a the bank’s shares. In detail this higher ratio would require the votes of at least 65% of shareholders owning half the shares represented, or of 75% of votes if there is no quorum. By the same token the agreement foresees also that the capital requirements of the banks are increased to such levels, as to prevent their managers from undertaking extra risks with other people’s money. It’s certain that more restrictions would have been introduced on the financial industry, if the US had followed Europe over these lines. Unfortunately the American economy depends much more on the ‘paper values’ industries, than on the real ones. Fortunately on this side of the Ocean, mainland Europe has based its wellbeing on the real economy rather than on ‘fortresses of paper’.