The country has been briefed against the bankers for many months. There is an almost universal view that the bankers behaved badly, are paid too much, and should by punished in some way. Most politicians forget we are all bankers now, as collectively we own the largest UK banking group, and have various other shareholdings in the sector. The people are the true capitalists now.
I have argued before that we should immediately exempt most bankers from these allegations and remedies. Most bankers earn modest sums to act as counter clerks, loan executives, mortgage administrators, transaction handlers and the like. They were not responsible for the high level errors of judgement which led to the Credit Crunch, nor do they enjoy telephone number remuneration.
The targets are the directors and senior executives of the large integrated banks and the investment banks. They do earn large base salaries, and are used to substantial bonuses. Once paid as cash year by year, following changes these are now more likely to be paid as shares with a lock in period.
The prosecution case seeks to cut or limit these pay levels. The points made include:
1. The pay turns out to be subsidised by the state – directly in the case of state owned banks, and indirectly where a private sector bank enjoys past or potential support from the public sector if it gets things wrong
2.The bankers rewards are inflammatory to others who earn much less
3. Some of these senior bankers have failed to be good role models, abusing their positions of trust
4. The bonuses are based on taking excessive risks. If the risk works out the banker is rewarded. If the risk goes wrong someone else pays the bill
5. The bankers earn much more than many of the small businesses and homeowners they are lending to.
The case for the bankers is infrequently and feebly put. It probably includes:
1. Banking is an international business. If the UK imposes restrictions on rewards here that are not imposed elsewhere, the business will shift to other centres
2. Banks and bankers pay large amounts of tax which is crucial to public service provision in the UK
3. Banks were encouraged to lend large sums to mortgage holders and businesses prior to 2007 by governments keen to promote wider ownership and economic growth through excess credit
4. Banks expanded lending so much in direct response to central banks which set low interest rates to facilitate it, and under the watching eyes of regulators who said the risks the banks were running were just fine
5.Banks need to offer large salaries to attract the best international talent, just as football teams do
6.Bankers are at risk, and some do lose their jobs when they fail to generate the revenue they promised
7. High earning bankers pay more than 50% of their money in tax, which can be used to reduce inequalities.
8. Surely the regulators and government are most to blame for the Credit Crunch. The Labour government put in an entirely new system of regulation of its own, and it failed disastrously. Banks as well as the rest of the country relied on the regulation.
So should the Uk government do more to change the culture and regulate pay in the banks? My answer is both Yes and No.
I cannot accept public subsidy for large salaries and bonuses. That is why I opposed nationalisation of RBS, and why I still oppose the current pattern of remuneration in that state owned bank. I would be happy for the top management to make large sums if and when they sell the bank back to the private sector at a profit for the UK taxpayers. I am not happy about people who are effectively civil servants in a state bank being paid so much more than other public servants. As I favour split up and the sell off differing businesses from within the RBS stable, talent can be retained and incentivised around achieving good selling prices for bits of the business. The talented executives would get their reward as and when they have transferred assets and activities successfully to the private sector at a good price for taxpayer owners.
I do not, on the other hand, favour more intervention on levels of pay in private sector banks not in receipt of state subsidy. It is true that all important banks can and should borrow from the lender of last resort, the Central Bank, in times of trouble. That is not necessarily a subsidy. If it becomes in effect the offer of longer term subsidised capital to the private sector bank, then at that point there needs to be a negotiated conclusion on lower levels of remuneration in the troubled bank whilst it gets itself back into free standing profitable shape.
In future should there be another bout of poor regulation and banking excess they have promised to tackle it through a kind of managed adminsitration as I proposed for RBS. This means there need not be the same problem over remuneration and state subsidy anyway.
The curious thing is that the last Labour government nationalised a bank or two, but endorsed high levels of remumeration and bonuses and signed off all the top executive contracts. The incoming Coalition government was advised they had to honour the contracts. That all makes it difficult for Labour to complain about excessive banking pay, as they underwrote and approved it in several important cases.