Discussions in Brussels between EU country representatives on European banking ended last night, with the decision taken to automatically cap banker bonuses at the level of their salary or two times their pay, if a shareholder majority grants it. The UK is worried that the ruling will damage its position as a major international financial hub. But the story isn’t all about bonuses.

EU government negotiators insisted on bonus caps as leverage against their sign off on the Basel III accord, a globally agreed regulatory blueprint that will wreak significant regulatory changes on the banking system. However, if you are going to radically overhaul the banking system, it is probably best to do that in a time of financial stability. 

Right now we are grappling with a number of issue:  the Financial Transaction Tax, the so-called “Robin Hood tax” has been partly implemented across the EU with the UK exercising its Veto; we’ve got ex members of the Monetary Policy Committee openly bickering about the strategy going forward; Mervyn King is being voted down on the MPC looking for more quantitative easing; Paul Tucker (deputy Governor) is floating the idea of negative interest rates; and Paul Carney is hinting at alternative monetary targets.

In the midst of confusion and uncertainty, people are latching onto bankers bonuses and ignoring the fact that one thing we’ve learnt from the first truly global recession has been the importance of banks in stimulating recovery through lending. 

There is no doubt that banking practices need to be reviewed and part of that is assessing capital requirements. However, if banks are going to stimulate economic recovery, we need the best people running the banks, unfettered by political interference and with a clear regulatory pathway laid out for the coming years.