Attempts to clean up the financial system have become more urgent given reports of the banking world returning to normal.
There are suggestions that Goldman Sachs and Morgan Stanley could agree to pay out $34bn of bonuses between them later this year. I caught up with a friend at the weekend who works for a bank in the US: “Everyone is expecting a bumper bonus season, it’s going to be hugely controversial when this comes out,” he told me.
Of course lending has not yet returned to normal. But banks have been able to profit from recovery surges in some markets, for example stock markets outside Europe and the US. Soon it will be champagne time on some trading desks.
Today’s white paper on banking – issued by the Treasury – doesn’t seem to be greatly radical despite its broadly sensible tone.
1] It urges more sensible remuneration practices but fails to specify how pay and perks should be curtailed in any detail. The paper says “the FSA now has powers to penalise banks if their pay policies create unnecessary risk“. Every year the City watchdog will have to report on how banks are complying with a remuneration code of practice.
It will also “integrate oversight of remuneration policies into overall assessments of risk.” The Treasury is briefing that this means that banks with over-generous pay packages will have to hold higher levels of capital.
But how will they define “unnecessarily risky” pay packages? Herein likes the difficulty. I’m told the Treasury discussed the idea of a “maximum wage” and quickly realised it was unworkable. Let’s wait to see how this works in practice.
2] Alistair Darling (here is his speech today) will give the FSA a new statutory responsibility for financial stability but will otherwise leave the tripartite regime (Bank of England, FSA, Treasury) intact.
3] There will be a new “Council for Financial Stability” which will supervise meetings, three or four times a year, between representatives of the three bodies (who already meet regularly). These gatherings will be minuted and those minutes will be made public.
4] The FSA is strengthening rules to make sure banks hold enough capital as a buffer against losses.
Andrew Tyrie, a Tory MP on the Treasury select committee, said the white paper was “Rearranging the three key deckchairs on the Titanic”. There were questions as to why Mervyn King (governor of the Bank) only saw the report last week.
It was Lord Myners who hit the nail on the head when he told the committee this afternoon: “No amount of supervision will guarantee that you will make up for poor governance, poor management and a poor culture (at banks)”.
Jim Pickard
Kiran Stacey