Listening to Ed Miliband and David Cameron at prime minister’s questions yesterday, trading ad hominem insults over bankers’ bonuses, was proof, if such is still required, that our bankers have our politicians just where they want them – in a state of impotent posturing while the banking gravy train, its wheels still greased by massive public subsidy, rolls merrily on.
The new boss of Barclays, Bob Diamond, had earlier told MPs the time for ‘remorse and apology [presumably for screwing up the financial system and triggering a global recession] needs to be over’. Diamond doesn’t yet know what bonus he’ll be offered for 2010, to add to the £75m he earned over the previous five years at Barclays Capital. The departing CEO of Lloyds Banking Group, Eric Daniels, is said to be leaving with a bonus of a least £2m. And so the bonus-go-round birls on.
These, and many thousands more, are the six-nothings men of global banking who would have us all believe that the skills of the modern banker are so exceptional, their contribution so critical to the prosperity of our globalised economy, that individual annual rewards have, of necessity, to be priced in the millions. Otherwise this talent will go where six-zero pay cheques are still on offer.
We begin to see why national politicians who, in opposition, were bashing bankers with the best of them, are now going soft on even the most egregious bank bonus awards.
Back in the Westminster bear pit the nothing men – Mr Cameron’s description of the leader of the opposition, I hasten to add, not my judgement on either of them – wrangled on some appreciably bigger numbers. Whether the comparative proceeds from Labour’s one-off levy on bank bonuses in 2010 (£3.5bn) and this year’s receipts from the coalition’s ongoing tax on bank balance sheets (£1.25bn) represent a tax cut for the banks or not.
The nothing men in the Commons may have ventured into nine-nothings territory, but the low billions of pounds they are levying on the banks, whichever tax weapon they use, don’t begin to match the subsidies their predecessors shelled out, in all our names, to stop some of these same banks from going under after the Great Crash of 2008.
Just before Christmas, in its latest financial stability review, the Bank of England put a figure on that ongoing taxpayer-funded subsidy. For the big UK banks – like HSBC, Barclays, Lloyds and RBS – it topped £100bn in 2009, up from £50bn the year before. And if you throw in an estimate of the knock-on impact in lost global output of successive banking crises, the annual cost to the rest of us in lost jobs, services and general prosperity is going to exceed, many times over, any tax imposed by any of our politicians on bank bonuses, bank balance sheets or whatever.
Our biggest banks are, demonstrably, much too big to be allowed to fail, whatever the prevailing political bluster. In 1960 the UK’s top 10 commercial banks had combined assets representing just 69% of total banking sector assets. Last year, despite the crash, consolidation in the sector has been such that the top 10 now account for a whopping 97.3% of total banking assets.
But while, 50 years ago, the combined assets of the UK’s top 10 banks accounted for just 10.5% of our national output, today that asset pool, even post-crash, represents a staggering 4.6 times total UK GDP. Yes, in half a century their combined assets have grown from 10.5% of GDP to 459%. Three of the current top 10 – RBS, Barclays and HSBC – each has assets greater than our national output. RBS is, of course, largely state-owned. And the fourth in the list, Lloyds, with assets running at 74% of GDP, is also part-nationalised.
We begin to see why national politicians who, in opposition, were bashing bankers with the best of them, are now going soft on even the most egregious bank bonus awards. Investment bankers in these behemoths, who enjoy the fattest rewards, might take their much vaunted talents elsewhere. With them, at a time of significant fiscal strain, would go a sizeable chunk of UK tax revenues. And if you have large stakes in two of these banks to redeem, hopefully at a profit to the taxpayer, dare you bash those banks selectively lest the float price ultimately suffers?
So the coalition looks like flunking its pre-election rhetoric about curbing banking excess. While Labour, in opposition, is still struggling to craft a credible alternative approach. A one-year extension of its bonus levy looks puny. There are, however, plenty twists left in this saga yet. Banks may get away with this year’s bonus round whatever the public and armies of small shareholders being denied dividends think.
The Banking Commission has an opportunity to say what weak-willed politicians will not. That, in banking, more of the same will not do.
But the skills of senior bankers, which are now priced in the millions have another multi-billion headache to contend with in 2011. UK banks have up to £400bn in wholesale debt to repay and refinance this year. They will have to do that while under pressure from central banks and others to raise their capital adequacy levels and from politicians to lend more to business customers.
Then, in the background, the independent Banking Commission set up by George Osborne is considering some of the more radical proposals for breaking up banks with too big a market share or both retail deposit taking and investment banking arms. As Mervyn King, the governor of the Bank of England, noted in a lecture in New York last October: ‘Of all the many ways of organising banking, the worst is the one we have today’. As King put it: ‘This crisis has already left a legacy of debt to the next generation. We must not leave them the legacy of a fragile banking system too’.
By fragile, he means a system that continues to be susceptible to periodic crashes, where individual banks are still deemed too big to fail, where the costs of the next bail-out continue to fall on governments and the wider society rather than those who enjoy the benefits of bonuses with six zeros attached, through boom and bust. The Banking Commission has an opportunity to say what weak-willed politicians will not. That, in banking, more of the same will not do.
Alf Young is an award-winning journalist who writes regularly for the Scottish Review
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