From the TUC

Bonuses are a symptom and a cause

07 Sep 2009, by in Economics, International

Much coverage of the G20 finance ministers’ meeting has concentrated on disagreement between the anglo-saxon US and UK about how to regulate bankers’ bonuses.

It’s perhaps too easy to see this as UK bad, rest of Europe good. Anatol Kaletsky suggests that the increased capital requirements backed by US and UK governments cause France and Germany real problems as it would force into the open toxic debts in mainland Europe that have remained hidden, and that they were talking up bonuses as a diversion.(Though of course you could have both action on bonuses and capital requirements).

Discussion of bonuses often concentrates on their role as a cause of the crisis by incentivising risk without providing any punishment when things go wrong.

But there is a wider issue here about bank profitability. Why is it that banks can afford these kinds of pay-outs in the first place?

Banks are there to handle transactions and organise some peoples’ savings into other peoples’  loans and investments.
Their bonus pay-outs suggests that they are taking too big a slice.

Alex Brummer in the Mail last week had an interesting take on bank profits:

“But where has the profits recovery which has inspired this new confidence come from? The latest Bank of England data published this week showed an extraordinarily weak lending picture. Loans to companies and individuals declined at record rates in July. Companies paid down £8.4billion of debt, the largest decline for a decade. Households paid back £600million as they deleveraged too.

The implication of such trends is that the profits of traditional commercial banks, like Barclays or Lloyds, would drop as would be the case in any other business which experiences a fall in turnover. This is not happening for several reasons. The shrinking volume of loans the banks are making have become more profitable because of the widening of interest rate spreads. This is the difference between what the banks pay when they borrow money and what they charge customers.

But there is another reason too. Great chunks of bank earnings come from the so called ‘wholesale’ markets. This ranges from transaction-based trading in foreign currencies and other securities to money market deals. In fact much of the cash comes from the very same ‘swollen’ activities which Lord Turner proposed shrinking with a Tobin-style tax on dealings. There can be no real justification for governments propping up these less socially desirable transactions by banks when the market for their core activity – keeping the wheels of commerce moving – has gone into reverse.”

Banking is a utility, and should be seen as such.