Bank bonuses and linking banks with the rest of society

Should there be a windfall tax on bank bonuses? That's what's being reported as we approach the Pre Budget Report this coming Wednesday. There may be a good case but what matters more is how we improve banks relationship with the rest of society.

Investment bankers are expecting to receive large bonuses after a very profitable year. Those profits have come about because (on behalf of taxpayers) governments:

* took large stakes in banks to inject capital;
* guaranteed bank lending;
* lent money at reasonable terms to banks;
* insured almost all of banks toxic assets (the main cause of the problems);
* and with interests at historic lows in effect printed money and pumped it into the financial system.

If a frontline investment banker is not making money in this environment they may be in the wrong job.

So it's no surprise that the case for a windfall tax has gathered support (for example see Martin Wolf in the Financial Times). There is a certain justice about it, since the bonuses could not have been considered had taxpayers (including many now out of work as a result of banks' actions) not bailed out the banks.

It might be difficult to enforce because a competitive environment does exist. So a system-wide problem can be hard to solve without some level of international cooperation. And bonuses are not in principle wrong - many people in different industries earn bonuses. It depends on whether they are properly linked to performance (without being helped by taxpayers) and whether they are particularly out of proportion. There is scope for some government action to ensure taxpayer support is not being creamed off into individual pay packets.

But banks should be encouraged to be more rooted in our society. The time is surely right for some sort of Community Reinvestment Act - something which has been in force in the US for years. Banks should be required to invest in local communities. The Cooperative Party is promoting the idea. It won't prevent another crisis but it might help refocus banks and promote a long term sustainable banking model.

Stephen Beer, 06/12/2009

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