Rewriting the rules

Nicolas Sarkozy intends to lobby other world leaders in a bid to rein in large bonus payments in the banking world. French banks have said they will put their own houses in order, following a meeting with the President last week.

It was the seventh time in a year that banking executives had been summoned to the Elysee. They listened as Mr Sarkozy targeted his anger at huge bonuses still being paid to traders. He said he was outraged that the lessons of the crisis had not been learned.

Penalties as well as bonuses

Paris has to be above reproach, the President said as he announced new control measures for French banks that went further than expected. In future bonus payments will be partly delayed to take account of long-term performance. Payments will be closely monitored and enforced, and traders who lose money will be made to pay penalties. France would not do business with banks that did not comply. The President wants the issue to figure high on the agenda at Pittsburgh in September.

"I want the G-20 to examine several proposals," he said. "A limit on total bonus payments to a proportion of revenues devoted to investment - that's the first. The second proposal is a cap on the largest bonuses. And the third is to create in all financial centers, a tax on bonus payments that would fund deposit guarantees."

French banks had already agreed to tougher regulation than elsewhere. A new code of conduct drawn up earlier this year limits guaranteed bonuses and aims to discourage short term risk taking.

Humble pie

The catalyst for the Elysee meeting and still tougher rules was the revelation that BNP Paribas, France's largest bank, had set aside a billion euros for staff bonus payments. The news was like a red rag to a bull for the French president.

Outside the Elysee, the head of BNP Paribas, Baudouin Prot, was forced to eat humble pie. He promised that his bank's bonus pot would be cut by half this year. And he vowed that French banks generally would accept the new rules and set an ethical example from now on.

But there is some concern that the measures will not work unless they are applied worldwide. The head of another French high street bank has highlighted the problem of guaranteed bonuses.

"There are certain foreign banks, especially in London, that don't operate in the same way," said Georges Pauget of Credit Agricole. "That bothers us. If that handicap is removed in Pittsburgh, I think we will be able to function unharmed in the new system. If it is not removed, we'll have to see what else comes out."

Traders go where the money takes them

There have been warnings that if France alone applies tighter rules, traders will simply go elsewhere. Some have even evoked a doomsday scenario that Paris might become a financial desert.

"It is extremely difficult to regulate variable payments, without being prepared to take the very real risk of relocation to London," said Marc Lamy, a former banker turned financial headhunter with Boyden France. "We can however seek to introduce more rationality and transparency in the processes by which payments are calculated and awarded."

Are the banks doing their job?

Arguably more important to the economy than the issue of bonuses is the need for banks to keep lending to businesses and households. France has channelled billions of euros of state aid to banks to ensure they continue doing so. Yet recently there have been accusations that promises have not been respected.

"We've noticed a grave problem of communication and relations between banks and businesses," said Abdellah Mezziouane of the CGPME, the Confederation of Small and Medium Sized Businesses in Paris. "The banks aren't transparent over how they make decisions on lending".

Part of his job is to harangue banks into funding enterprises he says deserve and need credit. The CGPME claims that two-thirds of businesses need funding - and 78 percent are finding loans harder, not easier, to come by.

"Entrepreneurs receive standard letters saying that credit they've been getting for years is suddenly being stopped," added Mr Mezziouane. "I've got copies of letters that are astounding. Relations between bankers and business leaders are no longer close."

Last year the banks agreed to try to increase loans by 3 percent. But that was before the recession took hold. They argue that if targets have not been met it is due to a reduction in demand.

"Our loans to these companies have risen by 3.8 percent, that's three times higher than the average," argues Georges Pauget, chief executive of Credit Agricole. "French banks are playing the game. There may be occasional problems - but to say that French banks aren't committed is wrong."

Ready for the Pittsburgh showdown

In France, the gap between ordinary people and the banking world appears to be growing rather than diminishing. For President Sarkozy, only too aware of public opinion, the bonus issue provides another chance to take a lead on the world stage.

One prominent economist believes the Pittsburgh summit will be the last window of opportunity for reform.

"Next year we could expect a mild rebound in the economy," said Christian de Boissieu of the Sorbonne University. "I think the appetite for global reform is going to diminish. Pittsburgh is perhaps the last chance to draw together the main implications of this crisis."

The last G-20 summit in London in April set out broad principles for world banks. Pittsburgh will now see a French-led drive to enforce tougher restrictions. In the words of one French banker, they have been set the speed limits - now come the radar traps.

Report: Alasdair Sandford, Paris
Editor: Sam Edmonds