The £20 billion question

One of the features of the banking crisis has been the anger and incredulity of people at the sharp end of public expenditure cuts and the squeeze on real incomes watching those who run banks fill their boots. Even if the individuals at the top of most banks have changed, people still find it galling to see those at the top of institutions which only exist because of taxpayers’ largesse paid huge sums of money while they struggle with pay freezes, rising transport fares and other growing bills.

In recent weeks the political parties have debated different mechanism to control executive pay. But in relation to banks in particular, this is about more than a sense of inequality or injustice. It also relates directly to the function these businesses perform.

Alongside anger about pay, there is also the added problem of banks not carrying out the role people and businesses expect. There is not a single MP in the House of Commons who has not met small businesses seething at banks’ refusal to lend or at changing terms to make lending much more expensive. And we know that it is harder than at any time for decades for young people to get a mortgage on reasonable terms in order to buy their first home. An average age of 37 for those without access to the bank of mum and dad illustrates the problem.

The banks’ excuse for this is that politicians want two conflicting things from them. The first is that they restore their balance sheets and build up capital reserves in line with post crunch regulatory measures like Basel  III or the Vickers report. And the second is that we’re asking them to lend more at the same time as building up these capital reserves.

However, this argument about contradictory pressures has been thrown into sharp relief by Robert Jenkins, former Citibank/Credit Suisse trader now turned gamekeeper in the new Financial Policy Committee responsible for financial stability. In a speech towards the end of last year he accused the banks of wielding an argument which is ‘intellectually dishonest and potentially damaging’. He went on to say, ‘The truth is the banks can strengthen their balance sheets without harming the economy. They can do so by cutting bonuses, by curtailing intra-financial risk taking and by raising term debt and equity.’

This week, in front of the Treasury select committee Mr Jenkins went further and spelled out the link between the cutting of bank bonuses and the potential impact in the real economy. He said that if UK banks collectively cut their bonus payments by £1 billion that would support up to £20 billion in the real economy. £20 billion would make a real difference to small and medium sized businesses with good ideas who want to grow and employ people but who can’t get access to finance.

So this argument is not just about envy or about a sense of fairness. It also has a real world impact. Shareholders have allowed a situation to develop where there is an imbalance between rewards at the top and the function of the institutions. It is the job of banks to support the legitimate ambitions of people to own their own homes and to lend to businesses so they can grow, develop and employ more people. If they pay themselves too much, there is less available for these critical functions of the banks.

This article was first published on Progressonline on 18 January 2012

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