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"Shadow banking", literally
"Shadow banking", literally
François Vidal

-OpEd-

PARIS - Game over for the last of the European Marxists.

Europe is getting ready to cap the size of bonuses for bankers. New rules would prevent bankers in European Union countries from receiving bonuses higher than their annual salary. This world first would put an end to the practice that allows these “workers” to receive up to 50% of the wealth they contributed to create – right under the nose of the “capitalist” bank shareholders.

So unless the only holdout – the UK – somehow manages to derail the vote, come next year, huge bonuses will be a thing of the past. It was a question of public safety – these bonuses sometimes reached unjustifiable heights, which can sometimes be very tempting for traders, inciting them to take inconsiderate risks. Case in point the subprime crisis, the Libor scandal or rogue traders Kerviel and Adoboli.

This reform makes the European Bank like the financial world’s star pupil, the one who now offers the best security guarantee. The regulation process has been chaotic since 2008, but the goal has finally been attained. In the last five years, the risks of the Old Continent’s banking system have been significantly reduced. Prudential rules have been strengthened, monitoring has increased, the most speculative activities have been limited and now bonuses will be capped. This is a revolution, which bankers have not fully understood yet, but that certainly gives European taxpayers the feeling that they are better protected from finance’s depravation.

The problem is this is a false sense of security. For one simple reason – the field of action of this measure is too narrow. Two major actors in finance are largely able to bypass it. First, the American banks. The Basel III accord still doesn’t apply to them and they continue to grant generous bonuses. This year, Wall Street bonuses will cross the $20 billion bar. Enough to maintain the culture of greed at his highest level, while undermining European competitors.

Second, there is “shadow banking,” and more specifically the Wild West that is hedge funds. It’s an expanding market where everything goes and where bonuses are in the hundreds of millions, sometimes even billions of dollars. As long as these black zones exist, global finance isn’t done with systemic risks. The only good news is that the next financial crisis probably won’t start in Europe.

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