Archive for the ‘Banks & Bonuses’ Category

Banks: Costs versus Benefits.

Jeudi, avril 21st, 2011

The previous Labour Chancellor, Alistair Darling, having experienced first-hand the recent crisis in the banking sector during his three years in office, agreed that it made sense for the banks to hold more capital (10% tier one capital ratio) and to formally ring-fence off the riskier investment banking operations, as recommended by the Interim Report of the Independent Commission on Banking and Competition (see also Categories/Chairman’s Blog/Interim Report – Banks in the right-hand index column of this Blog). However, he did not seem convinced that such a rational approach to the problem of protecting the retail operations of the banks, would be sufficient to prevent the collapse in market confidence and resulting irrational sense of panic in the financial markets that occurred last time around or could occur in the future.
There is also the issue raised by the Commission, of the costs versus benefits of having large British banks such as HSBC, Barclays and Royal Bank of Scotland (RBS) based in the UK. The Interim Report claims that such large banks benefit from an implicit state subsidy of more than £10 billion a year by being headquartered in the UK since investors assume that a British government via the taxpayer will always bail them out in a financial crisis. Since the banks dispute this claim, they could decide to move if they find the new banking regulations too onerous and this will impact the British economy.
The Commission, however, views the City of London as representing far more than a few large, British banks and has found no conclusive evidence that they enhance the role of London as a leading international centre for financial services. Indeed, historically the growth of the City has been driven more by its openness to foreign companies and their success in entering the financial markets there. Needless to say, our major banks do not necessarily see it that way!
Our banks contribute to the British economy via tax receipts (to the tune of £53.4 billion in 2009/10) and employment. However, around 60% of this tax paid can be traced to domestic operations such as retail banking, which would still remain in the UK and employ the same people, even if the bank head office was moved offshore, the British-based profits still being taxed in the UK under international tax law.
Even investment banking would apparently not be that much impacted since British banks only account for around 10% of fees earned globally. Tougher regulations applied to British banks would not apply to major players such as Deutsche Bank, UBS, Credit Suisse, Morgan Stanley, JP Morgan or Goldman Sachs. They employ thousands in the City of London and around half of taxes from investment banking come from that paid on bonuses and salaries there. These major foreign banks have also chosen the City of London because it still offers one of the best environments for banking, with its knowhow and cluster of supporting services, the convenient time zone positioning between the USA and Asia, together with traditionally a stable tax regime (which British governments should never forget even with the current budget difficulties).
That said, market sentiment as illustrated in the opening paragraph of this article, can be a most irrational thing and for a major British bank to move its head office to New York or Asia, could have a negative impact on the City of London.

Interim Report:Banks & Competition

Mercredi, avril 13th, 2011

The interim report on Banks & Competition was issued this week by the Independent Commission set up by the government. It was immediately criticized as not going far enough by some. A comment received here on our Blog (see Chairman’s Blog/Categories/Bankers & Bonuses in the right-hand index column) also called it a complete whitewash! In contrast, the head of this Independent Commission, Sir John Vickers, denied claims that the banks would be driven offshore if his recommendations were implemented. He said that the banking system would instead be made safer and more competition encouraged by e.g. separating into independent subsidiaries a ring-fenced, systemic part which is not allowed to fail i.e. retail banking operations, and the other investment bank part which can fail. The dominant retail market position of Lloyds would also be reduced by their selling off of more high street branches.
A spokesperson for Metro Bank, a recent entrant and independent competitor in the banking market, was not impressed and viewed the recommendation for Lloyds to sell off more branches as pretty limited competition-wise. More was needed to promote competition and the proposals did not go far enough e.g. the regulatory process could be made easier whilst still protecting the consumer of course. Making it easier for customers to switch their accounts between banks would also encourage more competition.
Despite RBS (Royal Bank of Scotland) being said at the time of the banking crisis as 2 hours away from a complete collapse, the ideas of the Commission on how to protect the high street banks stopped short of recommending a complete split-up and they chose ring-fencing of the retail part instead. A commentator then saw the problem as the devil in the detail i.e. in getting the firewall in the right place to ensure nothing in terms of a financial contagion could get through from the more at risk investment subsidiary. In addition, protecting the UK-based retail services part of the banks would not be enough to protect them from their global operations. Metro Bank again saw separating the banks as also bad for business with fire-walls and ring-fencing of independent subsidiaries requiring the holding of more capital e.g. in the investment arm if formerly supported by the retail deposits. However, to completely split the banks apart could itself be a bad thing when taking the example of the HBOS (Halifax & Bank of Scotland) merger which was a bad deal at the time and would remain so despite selling off more branches to encourage competition.
A spokesperson for the CBI (Confederation of British Industry) said that they and Business in general were determined to keep the major banks head-quartered in the UK, noting that HSBC had been talking about moving their HQ abroad for some 30 years now. The challenge for the banks now is that not only are they being asked to up their lending levels to businesses but also to up their capital bases.
It will be interesting to see what results from the next 6 months of consultation now foreseen to take place with all interested parties before the final report is issued and whether the final recommendations are implemented.

Bankers, Bonuses & Competition

Mercredi, janvier 19th, 2011

Despite the financial downturn and the continuing public furore, JPMorgan last week announced it was paying its investment bankers some £6 billion in pay and bonuses for 2009. Citigroup, Morgan Stanley & Goldman Sachs will issue their results and bonus plans this week, the latter investment bank expected to announce a pay and bonus pool of around £8.5 billion. The results of British banks will be announced in February, the total associated bonus pool estimated at some £7 billion. Even state-owned Royal Bank of Scotland (RBS) is anticipated to pay its investment banking staff bonuses totalling £1 billion.
Excluding the state, the major shareholders in British banks are institutions such as large insurance groups or fund managers (e.g. on behalf of major pension funds), with those holding the biggest stakes including Legal & General, Axa, Fidelity, Standard Life, Scottish Widows, M&G (of Prudential), Aviva and Schroders. Together they hold around 15% of Barclays, 11% of HSBC, and 7% of Lloyds. These institutions are not necessarily content with the level of bonuses being paid out by the banks because they are also aware that these banks are still rebuilding their capital bases. However, they find themselves at the same time trapped by the demands of a market in which the banks have to pay big bonuses or lose staff to their competitors. Institutions are, therefore, looking to the politicians to find a long term solution to what could be considered a structural issue possibly requiring an overhaul of the banking industry, including the key aspect of competition.
The problem for the politicians, however, is that they cannot risk driving the wealth-creating financial sector offshore, its importance to the UK economy having increased as the proportion contributed by manufacturing has progressively decreased before and during the last 13 years of Labour government. Indeed the banks will pay an estimated £20 billion in tax this year. The Prime Minister has, therefore, called for an end to verbal attacks on the banks and blaming them for all the ills of the economy; the bonus tax demanded by his Liberal Democrat partners in government has also not been taken any further at present. Behind the scenes, the on-going negotiations (code-named Project Merlin) between the government and the banks continue to focus on increased lending to small businesses & restrictions on bonuses, in return.
In fact, bank bonus payments on average are expected to be 20% to 30% down on the year before, although this is said to be mainly due to the trading profits of the big investment banks having collapsed last year. The bankers are also seemingly feeling secure enough to suggest that the period of remorse and apology (e.g. of waiving of bonuses and giving to charity) now needs to end, as evidenced by the performance of Bob Diamond, the new Chief Executive of Barclays, before the Commons Treasury Committee. In addition, new regulations in the UK now mean that over 50% of a bonus must be paid in shares and deferred for 3-5 years, half of the other 50% in cash also deferred but linked to performance targets and the remaining cash then falling into the 50% tax band for top earners, with many bankers now given large increases in basic salary to compensate. This reflects the real world within which, however, the public perception also remains strong that bankers still earn significantly more than other professions, despite the taxpayer having contributed hundreds of billions of pounds to rescue the financial system and large numbers of public sector workers continue to lose their jobs, in what also seems a very unfair world.
Of course, if a major bank or open trading nation such as the UK chose to go against the global market, each would be likely to suffer financially and this then points to the need for a global agreement on financial market regulation. In the absence of this, some in the media point out that the banks make large profits mainly due to seriously overcharging corporate clients, companies which are in turn owned by the same big shareholders. Not all of these profits are returned as dividends to these shareholders, a large part being siphoned off to pay bonuses. There are also apparently, suspiciously similar charges for financial services such as underwriting of share issues, while the number of major players in the market has been reduced by banking failures during the financial crisis. Perhaps the Independent Commission on Banking which is looking into how to improve competition in the financial services industry will ultimately feel the need for a full-scale Competition Commission inquiry, as real competition would be expected to squeeze profits and the associated pay & bonuses. It would also be expected to reduce the level of bonuses paid out to (as admitted by at least one senior banker) quite mediocre talent, who surround the stars that really bring in enormous amounts of business and may well indeed deserve their extraordinary remuneration.