1 week ago
21
The EU’s signature post-crisis rule for taming Wall Street-style excess in banking may have accomplished the opposite of what it set out to do. Research from the Bank for International Settlements argues that capping banker bonuses didn’t curb risk-taking. It may have quietly encouraged it.
The EU’s bonus cap, implemented in 2013-14, limits variable pay for bank employees classified as “risk-takers” to 100% of their fixed salary. With shareholder approval, that ceiling rises to 200%. The idea was elegant in theory: tie compensation more tightly to outcomes, and bankers would think twice before swinging for the fences with other people’s money.
The BIS research, published on September 14, 2026, identifies a fundamental flaw in that reasoning. When banks can’t use bonuses as the primary carrot, they compensate by inflating base salaries. Those higher fixed salaries act as a kind of insurance policy for managers. They get paid handsomely regardless of whether their projects succeed or fail.
That dynamic creates what economists call a moral hazard problem. A manager earning a massive guaranteed salary still gets a bonus if a risky project pays off. But if the project tanks, the fixed pay cushions the blow. The asymmetry makes high-risk ventures look more attractive, not less.
Previous studies found that banks directly affected by the bonus cap did not demonstrate reduced risk profiles. Some evidence even pointed toward increased systemic risk among capped institutions.
Higher fixed salary bills also create a separate problem for banks themselves: they become harder to cut during periods of financial stress. Variable pay, by definition, can shrink when times are tough. Fixed pay can’t, at least not without layoffs. That means the bonus cap may have inadvertently made European banks more operationally rigid precisely when they need to be nimble.
The BIS research lands at a moment when the EU is already reconsidering its approach. In February 2026, the European Commission launched a formal review of the bank bonus cap framework, driven largely by competitiveness concerns.
It’s worth noting that the UK scrapped its own version of the bonus cap after Brexit, partly citing competitiveness concerns. British regulators concluded that removing the cap would actually give firms more flexibility to structure pay in ways that genuinely align incentives with prudent behavior. The UK’s post-Brexit approach relies more heavily on clawback provisions and deferred compensation.
Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.
English (US) ·