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The Deal: Euro Bankers Watch Talent Leave as Regulation Looms

NEW YORK (The Deal) -- Talent has been trickling out the doors of some European banks as dealmakers anticipate new regulation that will cap their bonus payments.

Sources say Barclays (BCS) has been particularly affected and suggest Deutsche Bank (DB) may also see bankers walk, with regulation due to come in during 2014 to cap bonuses at fixed pay for staff earning over 500,000 euros ($648,600).

Spokespeople from Barclays and Deutsche declined to comment. The regulation will equally apply to U.S. and Swiss banks where they have offices domiciled in the European Union -- but only affects what is known as "code" staff who take material risks or are in important control functions.

Some European banks plan to raise base pay to offset the cap while some U.S. banks have sought to lift staff allowances in their EU-domiciled offices. Barclays chief Antony Jenkins this week alluded to the impact on bonuses from ongoing scandals around rate swap and payment protection insurance misselling scandals.

"The [remuneration committee] will definitely want to see that reflected in the [bonus] pools," he told a media briefing.

In February the bank clawed back 450 million pounds from its bonus pool after it was hit with a 290 million pound fine last year for its role in Libor manipulation.

The EU regulation is designed to discourage the risk-taking that led to the 2008 credit crisis. A report commissioned by Barclays last year also found "that pay contributed significantly to a sense among a few that they were somehow unaffected by the ordinary rules," Rothschild vice chairman Anthony Salz wrote. Other bankers said European banks would be wary of granting large increases in base salaries as they tried to increase profitability under the close eye of regulators. They noted compensation at investment banks was relatively subdued in a quiet market -- but that talent would likely leave European banks before the recovery and compensation levels bounced back.

Some sources noted UBS had effectively exited the U.S. banking business over many years by acknowledging it wouldn't pay its bankers competitively, though the Swiss bank recently started to bring pay back in line with U.S. banks. European firms continue to pay more of their compensation in stock with "claw backs" and long vesting periods -- a double-edged sword, as the "cost" of leaving grows while other firms find it harder to "buy out' people given the availability of talent without similar costs.

Despite the new regulation, banks such as Deutsche continue to hire from Wall Street firms this year, including rivals JP Morgan (JPM), Bank of America Merrill Lynch (BAC), Citigroup (C) and Goldman Sachs (GS).

-- Written by Richard Collings and Jane Searle in New York

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