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Strike a Balance on Bank Bonuses

  • Published Date: Monday 14th February 2011
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Strike a Balance on Bank Bonuses

George Osborne has taken a bit of a kicking for failing to rein in the City fatcats.

 

The Chancellor had planned to begin his attack on the bonus culture with a low introductory bank levy in 2011.

 

But last week he reckoned the banks were ready to shoulder the full amount and slapped another £800million worth of taxes on them without warning.

 

The tax will bring in £2.5billion this year, equivalent to just over a half penny on the basic rate of income tax.

 

The fact that City has reacted with minor irritation and resignation suggests that the measures are relatively affordable for the banks which are expected to report total profits of around £24billion for 2010.

 

Their share values even rose following the announcement.

 

That tells you everything about a move that has led to the resignation of the Liberal Democrat Treasury spokesman Lord Oakeshott.

 

The general reaction has been fairly balanced however with some saying the Chancellor hasn’t gone far enough and others thinking that to raise the levy two years ahead of schedule is simply political point scoring on the part of Mr Osborne.

 

It’s a big and complex argument, and one that we should look a little more closely at.

 

So here we go…

 

We have given them £892billion in bailouts and support and they have given us £2.5billion in tax. To put it another way they’ve trousered £356 for every £1 they’ve paid back.

 

And now they are set to give themselves £7billion in bonuses.

 

RBS was bailed out to the tune of £54billion and its chief executive Stephen Hester is to take a £2.04million bonus for last year, his first payout since being parachuted in to run the bailed-out bank in October 2008.

 

Eric Daniels, his soon-to-depart counterpart at bailed-out Lloyds Banking Group, is to receive £1.45million.

 

Both will be paid in shares which will be deferred for three years, repeating the 2010 commitment that the cash element of any bonus will not be more than £2,000.

However it’s believed that the decision to award a bonus to Hester and Daniels will blaze the trail for other bank bosses to accept their first bonuses since the crisis. Bob Diamond, chief executive of Barclays, is in line for at least £8m, and Stuart Gulliver, the chief executive of HSBC, around £9m.

At a time when SMEs in the UK are struggling to get access to the cash to grow their businesses, throwing bonuses around like confetti can appear to be verging on obscene.

But the Chancellor has to be careful of not taking cheap shots at the banks in a rise to the populist demand.

The banks must surely be a touch unnerved by Osborne announcing another £800million of taxes over his morning coffee.

What’s to stop him doing it again when he needs to get back on side with the electorate?

For me it’s about striking a balance as we can’t allow the banking institutions to pack-up and go and do their business some place else.

A bonus culture will always exist to attract and incentivise the best people but it’s important that it is sensible and doesn’t foster a culture of the irresponsible and reckless behaviour that led us into the recession.

The best thing to come out of the talks is Project Merlin, the government’s scheme to get banks to lend more to small businesses.

The banks have become risk-averse since they faced going under and quite rightly it would be irresponsible for them to make uneconomic loans again.

Pre economic meltdown they lent too easily and now they are being criticised for not lending enough – it’s an odd and uncomfortable position they find themselves in.

However under Project Merlin RBS, Lloyds Banking Group, HSBC and Barclays have pledged to lend £190billion to businesses this year, including £76billion to small businesses, up 15 per cent from 2010 levels.

This is a definite step in the right direction and positive news for strong businesses struggling to fund growth as we exit the recession.

The next big questions to be asked of the banks will be to reduce the cost of borrowing and to see a return to localised decision making.

Swift action on both will not only support the growth of business across the country, but will enable the government and banks to comfortably meet their agreed borrowing targets.

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