The solution? Encourage alternatives to banks
Antony Jenkins, who replaced Bob Diamond as chief executive of Barclays Bank during the Libor scandal, says that Barclays should be seen as a bank that is “doing well financially and behaving well”. Now Sir David Walker, the urbane chairman (and G30 alumni) and Jenkins hope that by revealing the numbers earning more than £1 million a year Barclays will prove itself a good corporate citizen. (On March 9, The Times reported that more than 500 bankers working at “two British banks found guilty of attempting to rig interest rates” (Barclays and RBS) were paid £1 million or more each last year).
In other words, it is silly season for bank bonuses again. Every year, as bankers gratefully clutch their bonus cheques, new rows erupt.
If bank bosses hope this disclosure will help, dream on. The political heat on banks is not going away, and for good reason.
The globally systemic international financial groups (G-sifis) are benefitting from an effective state subsidy due to the perception they are too big to fail. This subsidy has got larger since the financial collapse. Andrew Haldane estimates it is worth “hundreds of billions” of dollars a year.
Such banks are able to attract funding at rates far below what they would have to offer without the state safety net. So the profits of these banking groups are artificially boosted by governments desperate to keep them afloat and encourage them to lend. They have only a tenuous connection with what banks actually do, the services they offer etc. Bankers could spend their whole time on the golf course and governments would have to ensure that their institutions would still make profits. So their pay also reflects the state subsidy.
At the same time, more evidence has comes to light of the nefarious activities of many leading financial institutions. Here again, the public suspects that they can get away with such activities, without fear of criminal charges, because governments are too frightened of the effect that bringing charges would have in destabilizing the global financial system. On the failure to bring charges see this.
The result? Organisations engaging in grossly anti-social, and arguably sometimes criminal, activities can grow like a cancer through our financial and political system because we are too fearful to cut them out. We also have to reward the bosses who run them with essentially unlimited bonuses. From this perspective, the renumeration consultants which all financial institutions retain to advise them on “comparable pay levels” for particular jobs – and give superficial “justification” for bloated pay levels – are just small cogs in a diabolical machine.
Restricting bonuses as a proportion of pay as the European parliament is doing is useless. As bankers gleefully point out, if you insist on curbing our bonuses, we shall simply demand much higher fixed salaries. And you don’t dare interfere in the “market” determination of pay, or freedom of contract, do you?
So the bankers can charge whatever they think the market – in this case governments – can stand. It is good to see Nigel Lawson in the UK calling for the nationalisation of RBS, and MervynKing agreeing, just days after the Chancellor George Osborne said the opposite:
The Bank of England governor told the banking commission it was a “nonsense” that the banks could be run at “arm’s length” from the Treasury, through UK Financial Investments. King backs full nationalisation, which would allow RBS to be split into two: into a “bad bank” of troublesome loans and “good bank” that can make fresh loans to cash-strapped businesses.
The sensible proposals of the Vickers and Liikanen Cimmissions will come to be seen as helpful, half-way houses as we travel towards more radical solutions to this problem.
The fact is that short of taking over all the G-sifis (which they cannot afford), there is little governments can do about it, within the current banking system. So instead we get a lurch towards Soviet-style planning and direction of credit, and multiple restrictions on banks’ finances (capital, liquidity, leverage, assets), staffing, and assets, making it impossible for them to support economic growth despite massive continuing subsidies. Good bankers are as appalled at this mad system as any other sane person.
That is why I argue in my book that they will all break up – eventually. It is just a question of how long it will take and how much pain we all have to endure before they go the way of the dinosaurs.
The better solution is for governments actively to encourage alternatives to banks, as outlined in The Money Trap. Alternatives are emerging through market pressures, but far too slowly owing to the protection afforded banks by governments.
Note to editors: The Money Trap puts forward the thesis that the world will not get out of the trap until we have achieved far-reaching reforms both tofbanking, money and capital markets, with a wholesale shift to equity awary form debt finanvce, and a refomr of the international monetary system with the recognition of the need for a global international money and banking standard.