JPMorgan is increasing its cap on banker bonuses in the UK from 2 times their base salary to 10 times.

This dramatically increases the amount that the best DCM bankers in London can earn at the bank – increasing the attractiveness of being based in London for these rainmakers.

If this is where the best DCM banker talent can be found, the centre of mass in London will increase for investment banks.

This decision by JPMorgan follows a similar decision by Goldman Sachs – which increased its bankers’ bonuses to 25 times their base salaries.

JPMorgan has not reduced bankers base salaries – but Goldman Sachs did reduce salaries for their bankers.

It is expected that all other top tier investment banks will follow.

With large discretionary bonuses back on the table, the incentives for bankers to outperform and innovate increases by perhaps an order of magnitude. With a low bonus cap, the risk-return for taking chances on new initiatives was poor in many cases – where if things went wrong you risk your high base salary, but if things go well, your upside is limited. With large bonuses available again, this changes.

Overall we expect this to be highly positive for the city of London as a hub, and positive for the UK and Europe economies through improving their capital markets.

With increased incentives for financial performance, the UK regulators and other standard-keepers like rating agencies should prepare to up their capabilities. With greater financial innovation comes the chance of new systemic risks – which the regulators need to have the capacity to monitor, understand and mitigate. This is especially the case with structured debt capital markets products – which can create tremendous value to global growth, but can also create crises if risks are not mitigated at a system-wide level as we saw in 2008.

We would suggest that governments take this opportunity to invest in its regulatory bodies – allowing them to hire greater numbers of high-expertise people – who will be able to implement the right regulation that protects from risks without damaging capital markets improvement. Many of the best people would be expensive (and increasingly expensive with higher pay now available at banks). But this is a tiny cost relative to the new income economies can expect with more effective capital markets.