Peston's Picks - Details

When I reported back in June that a revised European Union directive would have the effect of applying new rules on how bonuses are paid to more than 2,500 City firms - up from just 26 large banks right now - there was widespread scepticism (see my post, Crackdown on hedge fund pay).

However the FSA has today confirmed that is what will happen.

And the City watchdog points out that equivalent restrictions are also to be applied to insurers and most fund managers, including all hedge funds, when two other EU directives come into effect in 2012 and 2013.

However the FSA's consultation document on the implementation of the rules implies that it may in practice allow some firms to breach the pay restrictions, if those firms are not regarded as big enough or important enough to pose dangers to the stability of the financial system.

That said, many firms will henceforth be obliged to defer between 40% and 60% of any bonus over three years and to pay no more than half of any bonus in cash, as opposed to shares or other securities.

Many City firms won't like this infringement of what they see as their fundamental right to pay as much as they like to whom they like in whatever way they like.

But there's no escape from the rules within the Europe Union. And for big banks, there's very little hiding place anywhere in the world.

But for other financial firms, shelter from the official scrutiny may be obtained by fleeing to Asia or Wall Street or Switzerland.

There were results from seven FTSE 100 companies this morning: Rolls-Royce, BAE Systems, Royal Dutch Shell, AstraZeneca, Reed Elsevier, British Sky Broadcasting and BT Group.

They provide some kind of picture of the health and prospects of Britain's biggest companies.

What they show is that BigCo has come through the worst recession since the 1930s in better shape than some might have expected: typically their indebtedness has been falling gently and is at bearable levels; sales and earnings are flat or rising gently.

There's a strong emphasis in their respective announcements on containing or reducing costs: Shell boasts of enormous $3.5bn annualised cost savings that it has made; BAE cut headcount by 3,300 in the first half of the year; all BT's profit growth came from reduced operating costs; AstraZeneca is closing two major research sites; at Shell, net capital investment is broadly flat; at Reed, the emphasis is all about generating cash in a climate where demand from business and professional users is flat.

And although they all talk the talk of investing for the future, in practice they are maintaining investment rather than increasing it: investment in research and development at Rolls-Royce was flat at £436m in the first half; capital expenditure at BT fell in the first quarter; at AstraZeneca there's very tight control of investment.

Now the one outlier or anomaly is British Sky Broadcasting, which happens to be the most domestic and the most consumer facing of all the businesses. What is striking about BSkyB is that its emphasis is on containing cost growth rather than cutting costs. It significantly increased investment in new programmes and content and it is putting money into new services (such as 3D TV).

So what does all this mean for the British economy?

Well it would be dangerous to draw firm conclusions, even from the results and expectations of seven such big companies, partly, of course, because all of them (except BSkyB and to a lesser extent BT) are very international, both in terms of where they employ people and where they sell their stuff. Arguably they're only British in the sense of where they have their respective head offices.

But their plans do pose something of a challenge to the government's hopes of a "balanced" economic recovery in the UK.

In a climate where public spending is being slashed and where British consumers cannot and should not be relied on to increase spending, because of the imperative of paying down their record debts, it really matters that BigCo invests more in the UK, employs more people in the UK and exports more.

At some point, all of that will of course happen. But it is not obvious from the results and expectations of these seven companies that the revival of business leaders' animal spirits will happen sufficiently quickly to prevent economic growth in the UK being anaemic to the point of non-existence for some considerable time to come.

Earlier this week, the so-called Basel Committee on Banking Supervision - the supreme decision making body for global banking regulation - decided to delay till 2018 the implementation of new rules that would strengthen banks.

Which is so far off that some would query whether those rules will ever really be implemented.

But Mervyn King, the governor of the Bank of England, told MPs today that more rapid implementation would have risked snuffing out our fragile economic recovery, because the effect of the new rules would have been to deter banks from lending.

As for investors, they love the delay: shares in banks have surged relative to other shares in the past few days.

Why is that? Well the new rules would force some banks to raise billions of pounds in new capital as a buffer against potential future losses. And whenever banks issue shares to raise capital, that reduces the value of existing shares.

Here's the paradox: investors positive reaction and the rise in banks' share prices will tend to reinforce economic growth and should thus strengthen banks; but if there turns out to be another banking crisis before 2018, banks may not be in optimal shape to cope with it.

PS I intend to write a longer analysis of Monday's revisions to the proposed Basel lll rules on banks' capital adequacy. There are reasons to be concerned about the foundations and philosophy of this attempt to learn the lessons of 2008's banking meltdown.