By Ian Fraser
Published: Sunday Herald
Date: 26 September 2010
If British banks want to win back friends, they sure have an odd way of going about it. Their crabbit response to the Basel III rules, which will require them to increase capital reserves and retain better quality capital, was a case in point.
FSA chairman Adair Turner said last week that the new rules are still too lenient, and he was right. But the banks have told us that, as a direct result of the rules ushered in by the Basel committee of the Bank for International Settlements’ earlier this month, they intend to lend us – both consumers and corporates – £1 trillion less over the next decade. They also warned that credit would become even more expensive and that the economic recovery would be jeopardised.
It would appear the bankers, and particularly their apologist-in-chief Dame Angela Knight, take us for fools. By the time the new capital ratios apply – they don’t need to start phasing them in until 2013 and full implementation is not required until 2019 – we’ll be past the recovery and into the next boom.
What the bankers didn’t tell us is that there are plenty of other ways in which they could meet the new requirements without having to tighten the screw on their customers. These include higher profit-retention and limiting the amount they pay themselves in bonuses.
The Basel III rules are the cornerstone of the G20’s response to the financial crisis and part of global efforts to ensure banking and financial markets become sustainable. They redefine “core tier-one capital”, a measure of a bank’s solvency, and require banks to have sufficient liquidity to survive another crisis while reducing their dependence on short-term wholesale funding. The new ratios would not have saved the banks that failed in the crisis, and critics question how successful they will be at altering banker behaviour, but they are a step in the right direction.
Yet Knight, chief executive of the British Bankers’ Association, was almost entirely negative in her response. She said the Basel Committee has given UK banks little choice other than to widen the margins on loans. She spoke ominously of Basel III “sucking money out of the economy” – seemingly oblivious to the fact the banks’ profits, bonuses and crazed speculation are doing that on a massive scale already. German banks and those in other countries joined the chorus of disapproval.
The public was not fond of banks before the crisis and it is even less fond of them today, as evidenced by widespread support for last week’s attack by Business Secretary Vince Cable. If Knight had any desire to win back public support, she might have chosen a different path.
The truth is the banks have far more flexibility than Knight makes out. Rather than just passing costs on to their customers, for example, they could cut back on the salaries, perks, bonuses, long-term incentive plans and pensions to which bankers’ grew accustomed during the credit bubble.
There is no reason for bankers to pay themselves as much as they do.
The likes of Knight, Lloyds Banking Group chairman Sir Win Bischoff and Royal Bank of Scotland chief executive Stephen Hester have claimed that unless banks pay the “going rate” for “talent”, they will suffer a brain drain and reduced market share. Yeah, right.
These self-serving arguments are looking increasingly threadbare. Is lending money really so difficult that people will only do it if they know they are routinely handed mega-bonuses? And isn’t one of the key lessons of the crash that incentivising people through short-term bonuses, however these are paid, is a recipe for recklessness and institutional self-destruction?
And why do banks have no interest in rewarding those responsible for the avoidance of losses, risk managers for example, as handsomely as the risk-takers? Current pay policies, which remain largely unaltered despite the crisis, are akin to paying football midfielders 30 times what the goalie and the defenders are paid, while the strikers and the team manager are on 50 times as much.
Privately, senior bankers admit the current system is absurd. But no-one dares call a halt to the state-subsidised carnival of greed.
Other ways in which banks might consider meeting the new capital requirements without having to penalise customers include tying up less of their capital to support “socially useless” activities such as proprietary trading and market speculation. They might also like to consider cashing in some realisable profits earlier and selling off more of their non-core assets. Banks could also tap the equity and bond markets for capital and retain more of their net earnings before bonuses.
Banks should recognise that their number one priority ought to be rebuilding trust. However much they throw at nauseating TV commercials, they are not going to achieve this while they continue to prioritise their own self-interest over the interests of their customers. The bankers’ unconvincing scaremongering over Basel III fools no-one and alienates everyone.
- The article was the main business comment in the Sunday Herald on Sept 26th, 2010. Originally published under the headline “Give us credit where it’s due”. To view it on Herald Scotland click here