Click here to read Martin Wolf’s opening salvo
By Jo Johnson
The ‘bonus’ debate boils down to what type of banking system you want. If it is just utility banking, then kiss goodbye to the City of London and much of the economy of the south-east of England. We do not need hundreds of thousands of people to manage the country’s current accounts and loans to small businesses.
The problem is not just that there would be few takers of any calibre for employment in such tedious institutions, but that they would not be needed. A rapid move towards utility-only banking would be a quick way to kill off the financial services expertise that the City of London and Edinburgh has developed over centuries.
There is also a muddle over how governments should go about influencing pay. Yes, governments have an interest in bankers’ pay, given the extent to which skewed incentives have helped create the crisis. But if governments are to control compensation to the extent you wish, then they will have to take outright control of the banks and start setting out top-to-bottom pay policies in remuneration committee meetings.
In my view, far better than arbitrary caps would be for the Financial Services Authority to persist with the approach already outlined, which is one of tailoring capital requirements to the risk embedded in compensation structures.
Lastly, for the unfortunate taxpayers that have been dragooned into pouring trillions of dollars into these institutions, it is a matter of critical importance that the right people are now in charge. Do British taxpayers really want the junior bottle-washer from the Treasury in charge of RBS’s £1,800bn balance sheet?
Overseeing the delicate process of deleveraging balance sheets, managing loan portfolios through the steepest global recession in two decades and restoring confidence in financial institutions in capital markets is an exercise that will now require real skill.
Of course, it is easy to reply that Treasury officials could hardly do worse than the masters of the universe who have landed us all in it. But that is not the point. The challenge now is to construct proper incentive packages for the new brooms now running many of the world’s banks so that they have every incentive to turn them around and deliver big returns for taxpayers.
Who will begrudge Stephen Hester a big bonus if he rescues RBS and saves our children from decades of punitive taxes? Certainly not me. If he feels he needs to offer some decent bonuses to keep the profit centres ticking over, I’m prepared to trust his commercial judgment.
As for the argument that banking sucks in too many talented people in the UK, this is true enough, but that is because it is an industry in which the country has enjoyed a real comparative advantage. There are not many of those. What other globally significant industry will it excel in to the same extent in time to avert a huge brain drain and/or graduate unemployment? Not all countries can rush to be manufacturing powerhouses at the same time, however much governments may now be regretting their neglect of their industrial bases. Some should now stick to their knitting and Britain is probably one of them.
