Bank Bonuses: UK Leads Regulatory Charge, Bankers Meow in Agreement

By: CaraTan   Date: 30 September 2009

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1 October, 2009. The five largest banks in the UK have voluntarily agreed to limit their bonuses for 2009, in what could become a moral victory for embattled Prime Minister Gordon Brown. As our Chief Political Economist David Caploe will tell you till he is blue in the face, this is in sharp contrast to the US, where bankers are taking home record bonuses while unemployment climbs above 10%, and Obama asks quizzically 'why should we limit bankers pay?'

The British Treasury has just announced that the five largest UK Banks, who are in order HSBC Bank Holdings (with a market cap of GBP 125.54B as of May 2009), Barclays (GBP 41.12B), Standard Chartered (GBP 30.96B), Royal Bank of Scotland Group (GBP 29.90B0, and the Lloyds Banking Group (including TSB, GBP 28.86), have agreed to apply stringent new bonus rules on their 2009 bonuses. These rules include:

    • More transparent disclosure of who receives what bonus
    • Payments to be made over three years rather than immediately
    • Clawbacks if the firm's performance suffers over time

These rules are designed to made bankers more focused on long term performance of their company, and less oriented towards shorter term, higher-risk higher-reward transactions. Investments will need to stand the test of time for bankers to continue to grow rich to the levels that they have come to believe are almost a sacred right.

The key question now is, why would any self-respecting (ie greedy) banker voluntarily limit their bonus? There are a couple of things we need to understand.

British bankers have been put under extraordinary pressure during the financial crisis. Unlike in the US, in the UK the general public tends to be sceptical of big business, and 'fat cats' have long been a target of tabloid newspapers and its readership across the spectrum of political opinion.

And while these bankers were initially able to resist both personal responsibility and public scrutiny, they simply don't have the 'buying' power (ie lobbying dollars) of their American counterparts. Eventually the dominos fell, and once mighty bank chiefs said 'sorry', one by one, as their feet were held to the fire in daily Commons committee meetings that felt like kangaroo courts. The American public, sadly, has not had that balm applied to its wounds.

Then there is the small detail of ownership. As part of the UK government bailout of British Banks at the height of the Financial Crisis, it owns controlling stakes of 70% in RBOS and 43% in Lloyds. Its Special Liquidity Scheme, loan guarantees and other capital investments have arguably kept the whole system going.

While the bankers have bought the government and committee members in both parties in the US, in the UK it is the government that is running the banking system. It is better for the banks to play along and work out how to soften the margins than to oppose these moves and risk further wrath.

Finally there is the political backdrop. Gordon Brown has all but conceded that he and Labour will lose the general election in 2010. What he must do now is protect the core, so that the party does not get decimated and can maintain a credible opposition presence.

To do that he must ditch some of the New Labour froth and go back to the core of Labour values and voters; in effect that means protecting the little guy from the fat cats.

He has therefore decided to champion legislation on restricting bank bonuses that will be the 'toughest' in the world. We have already talked about Red Adair and his leadership of the Financial Services Authority directly confronting bankers. Mr Brown now suggests he will go even further. Although the new bill will not pass in time for 2009 bonuses, the banks are signing up to support it through their voluntary actions, and this could boost both Labour and Lord Adair.

It is likely Mr Brown will not take up the cause in the G20 and push for global standards that follow the British lead. This will reduce friction with other European leaders, who are also calling for tougher regulation, but will pit him against

Obama, who told Bloomberg:

 

Shareholders are the "best check" on pay practices, and government shouldn't dictate standards when firms avoid taking taxpayer funding, Obama told Bloomberg News on Sept. 14. "You have to start asking yourself: 'Well, why is it that we're going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or NFL football players?'"

Leave aside the fact that NFL football players do in fact have pay caps, you have to ask yourself why the man who campaigned on Change is so committed to not changing anything for the guys that caused the Financial Crisis, and who are still paying themselves record bonuses?

Thankfully there are people who have political reasons to really go for change in banking regulations - we just hope to see more of them emerge in the US

Hosni Afleck, Guest Post for EconomyWatch.com

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