BIS says EU banker bonus cap may increase risk-taking

The European Union’s cap on banker bonuses may increase risk-taking rather than reduce it if banks replace bonuses with higher fixed salaries, according to researchers at the Bank for International Settlements.

The EU capped bonuses at twice a banker’s annual base salary after the 2008 financial crisis to reduce incentives for excessive risk. The BIS researchers said the policy can backfire because higher fixed pay provides managers with more protection if a project fails, while a capped bonus still rewards success.

Gaston Gelos, Bertrand Rime, and Kevin Tracol found no change in risk after the EU introduced the cap. They said the removal of a similar cap in the UK after Brexit did increase risk.

The researchers also found that banks deferring bonus payments over several years generally had better risk metrics. Longer deferral periods were associated with higher Common Equity Tier 1 ratios and larger capital buffers above minimum requirements.

The findings add to debate over how compensation rules should balance talent competition with incentives for prudent risk management across global banking markets.