This week the chief executive of Lloyds Banking Group has refused his 2008 bonus (though he is comforted by his £1 million salary), whilst the public expresses anger that any banking executive is accepting bonuses at all.
Bonuses are fine in principle, if they reward genuine success, and create incentives for responsible management. But bonuses in the City have been skewed, rewarding short-term success and excessive risk taking, without regard for the long-term growth of these companies. This disregard for risk resulted in the self-implosion of the financial system.
Every major bank in the UK has now benefited from public money, whether through their access to the Bank of England’s special liquidity scheme, or through direct injection from the Treasury, as in the case of RBS and Lloyds/HBOS. Clearly, the taxpayer should not be subsidising rewards for failure.
The former chairmen and chief executives of HBOS and RBS came before the Treasury Select Committee this week, and admitted that a fundamental review of remuneration in banking was needed. Andy Hornby, former chief executive of HBOS advocated a 3-5 year bonus cycle rather than the annual bonus system which has operated in recent years. However, all were adamant that their bonuses had been ploughed back in to shares and that as such, their interests were absolutely aligned with those of shareholders. Yet on their watch, the banks’ share price plummeted. Manifestly, their remunerative interests were not aligned with those of shareholders.
The most pressing issue facing the UK economy is still getting banks to resume lending. Without this lending, thousands of small- to medium-sized businesses could go to the wall, shedding thousands of jobs. Perversely, placing a cap on executive bonuses of banks who have received government support may introduce an incentive for bankers to pay back the taxpayer as quickly as they can – because once the state is repaid, the cap on these bonuses would be lifted. It is not in the interests of the country that banks should be diverting resources into repaying state aid at this time. They should be extending loans to businesses and customers.
Banks serve an important ‘utility’ function which we all rely on – current accounts, savings and loans. But over the last decade, they have also taken on a ‘casino’ function, trading and dealing in complex and risky financial products. It is in these casinos that the financial crisis originated, and here that eye-watering sums were paid out in bonuses. This is where restraint should be imposed.
It is important that the bankers do not invite further public anger by paying lavish bonuses backed by the tax payer, whilst unemployment rises as a result of their folly. Investors should be putting pressure on the directors. Shareholder vigilance is weak in this country, and as a first step in fostering more responsible banks, that needs to change.
John McFall is Chairman of the House of Commons Treasury Committee and MP for West Dunbartonshire