Impotent attacks on banks

The Tories and LibDems are focusing their rhetoric on the banks again.  Post the tuition fees debacle, Nick Clegg told the Financial Times that the government would not 'stand idly by' if the banks paid large bonuses this year.  Cameron changed tack and supported Clegg, while Vince Cable repeated the warnings in an interview with Andrew Marr on BBC1 today.

However, despite a meeting with bank executives this week the government doesn't seem to have any new proposals to deal with excessive bank bonsuses beyond vague threats to do something with tax at some point...possibly.  Labour's Alan Johnson has repeated Labour's proposal to tax the banks a bit further ie there is an alternative to hand-wringing (something the Liberals seem to be doing a lot of at the moment).

The banks bonus issue is not clear cut however.  Which banks are we talking about?  If the government is not going to split banking activities, it presumbably wants UK banks to be profitable.  That means they need to retain key staff and not see their investment bank businesses erode as an unintended consequence.  The banks (somehow bizarrely maintaining they have not gone back to 'business as usual') argue that overseas banks (and hedge funds) will poach staff.

As Paul Myners pointed out at the annual FairPensions lecture last month, these arguments about bonus competition have only recently been taken seriously ie since the election.  Myners also made the case that bankers' pay could be dealt with by agreement between the largest pension funds, since they own stakes in all the major (global) banks and it is not in their interest to watch their shareholder value wasted in zero sum remuneration games.

A government not so little Englander in outlook would work for such an agreement.  I can imagine Gordon Brown trying to make things happen in this respect if Labour had won the election.

It's not right that banks, which relied so much on taxpayers' funds to bail them out and guarantee their survival (and still do) pay their executives excessive salaries.  There is something distinctly unhealthy about it and I'm surprised there is not more introspection from the sector.  It's also not right from the perspective of shareholders, often our pension funds, that so much shareholder funds are siphoned off.

Myners made another good point - if banks are so worried about losing their star performers it shows they have not invested in institutionalising knowledge and skills.  Surely any company concerned with its long term survival would make sure it can survive a departure.  Look at high tech engineering companies for example.  Banking seems to be institutionally flawed.  That's why, ultimately, it cannot heal itself and should be reformed - to be profitable in a sustainable way in all our interests.

One roadblock in the way of this is the tax revenue the financial sector produces in one way or another.  In the end, bank reform has to run in parallel with tax reform too.

Stephen Beer, 19/12/2010

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