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Banks

 

Should we call their bluff?

 

Douglas Wood

 

Gateway to the RBS village
Photograph by Islay McLeod

 

Last month in the continuing stand-off with the government it was the bankers that emerged on top. Ministers blinked when threatened with the possibility that the banks, or the brightest of the bankers, might move off elsewhere if bonuses were reigned in.
     This month the chancellor retaliated by adding £800m to the bank levy. This irritated the bankers, more because of the capricious manner of imposition rather than the size of the financial penalty. If it wishes to keep the moral high ground the government may need to employ greater integrity and transparency when it sets about controlling the financial sector. The chancellor had been swift in expressing support for the Irish when they required bailing out, saying that Britain would do all it could to help our closest neighbours. When he met the bankers did he point out the opportunity presented by their bonus pool which exceeded Britain's share of Ireland's rescue package?
     Describing the bonus pool as a bonus lake would help convey the impression of a glut formed by perverse incentives arising from skewed regulatory policy. Not only is it huge, it is difficult to comprehend the number of people who stand to benefit so enormously from it.
     The chief executive of RBS admitted recently that many of the major beneficiaries were 'journeymen'. Unpacking this a little, many of these journeymen are like the backroom team that follows a football manager to a new post, indispensable to the main person. Would the 'journeymen' be less likely to be lured abroad than the stars or would they be part of the package moving on? There is at least scope for calling a few bluffs.

 

     A point already made is that although these high-fliers can be careless enough to make serious mistakes they are often smart enough to find ways of avoiding tax. The chancellor should ensure that bonuses do not escape relevant tax and national insurance contributions which would bring a substantial proportion of the proceeds to the treasury.
     Meanwhile the Independent Commission on Banking is deliberating the future for the sector. If there needs to be clear water between retail and investment banking, will these activities be completely split or merely ring-fenced within existing structures? Secure and reliable retail banking is required on the high street to provide services the public need and can trust. Investment banking too has a significant role in providing financial lubrication to drive the economy and it is arguable whether it would be in the national interest to allow investment banks to fail.
     The commission should give close attention to the scope of investment banking: which aspects are important for general economic well-being; what kind of risks they should be expected to take; their involvement in speculative trading such as acting as an umbrella for hedge funds; and in particular the wider consequences of allowing investment banks to collapse.
     It may be that some formula has to be found that prevents higher-risk speculation from jeopardising the core business of investment banking. Hopefully some important lessons have been learned. Any rescue package should have conditions attached, and the potential for rescue to be provided should be grounds for influencing business behaviour in good times. A report is due in September. It will be interesting to see how matters unfold.

 

Douglas Wood is a chartered financial planner and former
academic registrar