Tackling The Banks
There’s a new buzzword doing the rounds in the born again City – BAB. It stands for Bonuses are Back and its arrival in the lexicon is evidence that bankers are once again looking forward to bumper payouts, just eight months after the sector faces meltdown.
Goldman Sachs staff are now looking forward to the biggest payout in the bank’s 140-year history. Many other investment banks are anticipating stellar profits in no small part as a result of the chaos caused by their previous activities. Bond markets are hectic as a result of governments’ needs to finance their deficits, while economic problems have created (profitable) volatility in foreign exchange markets.
When even majority government-owned banks, like RBS, join the party, you know the system is rotten. RBS chief Stephen Hester’s £9.6m bonus shows that bankers haven’t changed. Indeed, there is growing suspicion that this lethal breed is going back to business as usual, although the financial crisis remains unresolved – frightening prospect for taxpayers everywhere.
Fading political will to secure a strong regulatory response – and a good deal of sustained lobbying – would appear to have let banks off the hook. That is dangerous, particularly against a background of unresolved global imbalances. There must be a possibility that, with bankers once again at play, the financial system will return to chaos in the not too distant future.
What should be done? Bank of England Governor, Mervyn King, argues that investment and retail banking should be separated, along the lines of the old US Glass-Steagall act. His reasoning is that it is too risky for high street banks to continue playing in the casino of investment banking. The problem, though, is that shrinking banks so dramatically would generate a big chill just as the markets are beginning to unfreeze.
Without its investment banking division, Barclays would have joined RBS and Lloyds as a burden on the taxpayer. It would be better to follow the FSA’s strategy of making banks reserve more capital the banks warn that even a tamer crackdown could stifle recovery, because the more capital and liquidity a bank has to hold, the less they are able to lend.
That’s a valid point. The crucial thing now is to get enough money into the system to get the taxpayer off the hook, keep good businesses alive, and convince jittery foreigners to find the Government’s truly extraordinary borrowing requirements. The niceties of financial regulation can wait.