The political and media focus on the level of banking pay and bonuses since the financial crisis is collapsing into farce. This week the coalition government are seeking to agree a link between the level of lending to industry, (especially to SME’s such as PMi Global) and agreement to allow accrued bonuses to be paid. This is nonsense.
So many people working at the branch level of retail banks and in the back offices of most non-investment banks have never benefited in any significant way from the bonus culture. Mega bonuses only ever truly apply in the board rooms and the deal making departments and dealing rooms of the investment banking industry.
A 50% tax rate is a pretty big disincentive to taking a million pound plus bonus and allowing it to fall within the UK tax net. You can be fairly sure that sophisticated tax planning will ensure such things do not happen to senior managers. It is the middle managers who will pay the extra tax. Incentivising staff with performance related pay has long been seen as beneficial but must bear some relation to the long term performance of the overall business not a single unit. In that way we ensure team building and avoid the huge egos that lurk in every dealing room. It must also reflect the risks borne. Most proprietary traders are not risking their own money but rely on the bank’s corporate capital. They are not held accountable for the losses that may result, so it becomes a one way bet. They are expected to make a profit; that is the job, if you don’t do that you should be fired, but there should be no need to share the resultant profits with the trader. We need to break this culture of avarice.
There is little chance of a change in banking salary levels which are out of step with other career options and industry sectors until changes are made from the top down. That means shareholders telling their board that the remuneration committee has to find new ways of retaining the most talented people, and that head-hunters need to draw from a wider pool of talent, rather than simply moving the pieces on the corporate chess board. In the end the market will determine the salary and remuneration packages of an individual. It will probably take a new player like Metro Bank to break the mould in retail banking and that will be a lot harder amongst longer established universal banks regimes.
A split between retail and investment banks would push the issue into the open with the latter being subject to less government control and as non-retail deposit takers being of less concern to politicians, but we have seen how quickly the knock on effect of an investment bank failure can freeze markets. Basel 3 and adequate capitalisation under new rules may seem like a solution but we must have learnt that it is not the problems you anticipate that cause market disruption but the lemming like behaviour of blind bankers all running in the same direction to make an easy dollar and losing sight of the fundamentals of pricing risk.
Prudent and smarter lending is what we require from banks not the centralised allocation of lending quotas to industrial sectors like a communist state. I spent many years in the early ‘90s explaining to newly recruited Russian bankers the economic purpose of a bank to redistribute efficiently idle capital into productive projects based on a risk weighted return model. It was the failure to apply such a risk weighted return to the pricing of banking assets that had the knock on effect of undisclosed (and in some cases off -balance sheet) imprudent lending to the US housing and property development market and holdings of related bond securitisation that caused the loss of confidence and liquidity freeze that led to the Lehman Brothers collapse. The interest rate risk may have been matched but the liquidity assumptions at each roll over required an ever open inter-bank market, which proved not to be the case and drove everyone to the lenders of last resort namely the governments and the central bankers.
While two of our major banks are rebuilding and restructuring under state control, their key focus is in achieving liquidity and capital levels that would allow them to emerge as solid independent banks and for the chancellor and the state to pocket at a minimum the GBP20billion profit that is reflected in their current share price. It would cover a large part of the current deficit reduction programmes requirements far better than the tax on bonuses.
David Lewis
CEO
PMi Global
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