Bank Bonus Tax

[Cambon]

The problem with current mode of economics is that these big companies know that ultimately the public will bail them out when they are in trouble. Why should they expect otherwise when governments regularly bail them out?

 

At the moment, the uk is broke. If they had let NR, HBOS, RBS and B&B fail, all other banks would have failed and it would have taken the country down to third world level. They had no choice.

[manshimajin]

At the moment, the uk is broke. If they had let NR, HBOS, RBS and B&B fail, all other banks would have failed and it would have taken the country down to third world level. They had no choice.

Cambon it's a bit 'chicken and egg' isn't it? The UK has run a deficit economy for a long time with large borrowings serviced from revenue. This per se is not a bad thing. Many countries do this. What has brought the UK much closer to the cliff edge is the apalling business performance of the UK banks who happily kept on lending into a growing economic bubble compounded by the use of increasingly risky derivatives - and the poor performance of the BoE in not pushing up interest rates quicker to slow down the abnormal growth rate of house prices. Of course one should add to that some badly thought through acquisitions.

 

I would agree with your comment that if they had let the big banks fail it would have had a catastrohic effect on the economy (but BTW both NR and BB were allowed to fail and to then be nationalised/sold on). As things stand Lloyds HBOS and RBS are only in business today because of taxpayer capital propping up their balance sheets (no wonder their much diluted share prices are so low). Much of the profit being generated at present by all the majors is a consequence of the very low BoE rate and the added margins they can make on it. There seems to be much anecdotal evidence that the UK banks are still not back into lending to business on a scale to support economic growth.

 

My concerns in relation to bank bonuses remain that the current bonus culture internationally is not only capital hungry (when this is needed to prop up balance sheets) but is also high risk and in the past lead to poor commercial behaviour and decision making. In any sensible economic model a time like this would be used by management to get rid of unhealthy remuneration structures (viz BA). It does make me wonder (more than ever) about the quality of senior bank management and bank Boards. They seem incapapable (or unwilling) internationally of implementing a major revision of remuneration strategies. This may be because they are not particulalrly competent, lack the skills to handle complex commercial challenges or maybe they themselves have too big a personal interest in maintaining an economicaly irrational high-pay system.

 

The argument that if mega-bonuses are not paid people will move does not really hold up - 'key' people still move within the mega-bonus culture - and in any case if senior management is any good it will have development and succession plans in place. This argument also overlooks the fact that a number of major markets have now started to place caps on bank remuneration anyway - action taken by governments in the abscence of actions by business - unfortunate but an almost inevitable reaction to management paralysis.