Studio Guest: Jörg Rocholl, ESMT Financial Markets Expert

MADE IN GERMANY talks with Jörg Rocholl from the European School of Management and Technology about the problems with banking giants and the discussion about bonus donations. DW-TV: Axel Weber, the President of the German Bundesbank, presented a quite interesting and concrete idea by saying that banks basically have to put money to one side for a rainy day, so to speak. Do you think that's a good idea, could that work? Jörg Rocholl: Yah, definitely. It is a very good idea. We've seen that the money they put aside has decreased over time dramatically and I think it's a good idea to do exactly the opposite: to increase the money put aside -- in particular for larger banks which might be systemically more relevant than smaller banks. DW-TV: Because you just mentioned these "system-relevant" banks, why should they follow his advice? We just heard in the report that it's highly unlikely that any government would allow them to go bankrupt. Jörg Rocholl: Right, so the key part here is the common synonym of 'too big to fail'. These banks are so large that they know that the government will just bail them out should something go wrong. But if the pressure increases on them -- in particular the tax payers pressure them to not cover the losses again -- then there will be a chance to do exactly this: to increase equity requirements for exactly those banks. DW-TV: And will the pressure increase? I mean, the G20 Summit will be underway pretty soon. What outcome should you expect from there? Jörg Rocholl: I think the pressure is pretty intense -- not only in Europe and not only in Germany, but also on the other side of the pond. So we saw Obama's top economic advisor Larry Summers saying exactly the same in that sense with respect to the equity ratios as the Bundesbank president." DW-TV: What prompted the idea of bonus payments in the first place? Jörg Rocholl: In the first place it is about incentives. So basically to give incentives to employees to work harder, to work better, and just to return more to the company they work for. The key question now is how to design incentives. And this is the key part, or the key question for the way ahead. DW-TV: So originally it wasn't a bad idea, but it's gotten out of hand. And the interesting thing is, Wall Street obviously set the pace -- as in so many things -- also for bonus payments. In the 1980s bankers there earned about 2 billion dollars in 1985. Some 20 years later, their earnings increased up to 34 billion on Wall Street alone. And since the crisis, bonus payments are down to some 20 billion. Well, that's still a lot of money. What are such generous bonus payments based on? Jörg Rocholl: Well, first of all they are incredibly high. They're based on the profits that banks make -- unfortunately not always based on the profits that also sustainably can be achieved, but rather on short-term profits that have been made maybe in a given year, where risks only result at a later point in time. DW-TV: Like most state leaders, US president Obama has strongly criticised banker's bonuses, but he also doesn't support a hard cap on bonuses. So what else then? Jörg Rocholl: This is the key question: how to go ahead. The US has had some bad experiences with putting hard caps on salaries. For example, under President Clinton, there was a limit on the tax deductability of management compensation at 1 million US dollars. What happened? All of a sudden shares and options were given to managers. At the same time this year the taxation of bonuses was increased. What happened? The fixed salary was increased. So we always have to be very careful about the side-effects that happen, basically due to increased or changed legislation. DW-TV: So, it's not an easy problem to solve. Interview: Monica Jones

DW-World | September 22, 2009

Tags:. .bankers. .prompted. .bonuses. .respect. .theyre