Recent months have seen an anti-banking consensus emerge amongst the general population and the media. Bankers, and perhaps most notably their bonuses, have been implicated in the blame game currently being played out between banks, governments and regulatory bodies, in the wake of the financial crisis.
The Royal Bank of Scotland (RBS) has come under fire from the Government in the past few days for attempting to pay what are perceived to be ‘excessive’ bonuses. The Government currently has a 70% stake in RBS. Having received taxpayer money so recently, the decision to revert back to large bonuses is being seen as audacious.
In a similar case in the United States, leading investment bank Goldman Sachs paid 1556 members of staff bonuses in excess of $1million. This was despite the fact it had recieved emergency funding from the American government.
Last week, Deputy Labour leader Harriet Harman said: “They already earn vast salaries and now they are threatening to resign if they cannot indulge in largesse and the distribution of massive bonuses to top executives across the piste.”
On the subject of bank bonuses, Prime Minister Gordon Brown said that “nobody is being discriminated against, because every bank is having to follow these
procedures”. However, we believe restricting bonuses is idealistic and misguided. In the ‘real world’ not all banks have to follow this protocol and if Brown honestly believes this then he is deluded.
Limiting or removing bonuses is neither practical nor prudent. The consequence of imposing any kind of restrictions on bankers’ bonuses is a ‘brain drain’ effect. This can occur between banks, as bankers will simply move to firms that are willing to pay them more for their skills. Those institutions not restrained by the hand of Government will poach the best talent. It can also occur on a national level. If countries impose strict guidelines on pay and bonuses, multinational firms will simply re-locate and re-distribute their operations elsewhere.
Following on from this, some would naturally call for internationally agreed regulatory standards, but this is simply not a feasible option due to conflicts of interest between nations.
Tough regulations on bonuses could have drastic consequences for the UK economy, which relies on the financial sector to provide both jobs and lucrative tax revenue. Many voters fail to realise the amount of capital that flows in and out of London on a daily basis.
What is the use in having the financial heart of the world when there is no blood coursing through its veins? Heavy regulation would cause the UK to haemorrhage the cash flows it relies upon so greatly.
Bonuses however should not be handed out as a right. They should be directly linked to a bankers’ long-term performance and should not reward reckless risk taking. Any gambling element of banking should be minimised.
Alistair Darling, Chancellor of the Exchequer, said that “there are people who are too complacent in my view”. Darling also stated that the banks “need to be brought down to earth”.
We urge Darling to follow his own advice and not be too complacent with the UK economy, as going after the populist vote would be an all too easy mistake to make. Compromising the UK economy’s most vital asset for increased political support would be an irresponible decision. Although it may not be the moral option, bringing banks ‘down to earth’ may cause the UK economy to come crashing down with them.