Bankers' bonuses: Bad policy

Defend a banker anyone? Shall we forget the misdemeanours of the past few years and let them get on with it as they did previously? Was mis-selling, rate-fixing and wholesale impunity just a minor aberration?

Perhaps I am being flippant, but really is it time to move on with how we treat our financial services sector?

There is anger and deserved contempt for the profession, and to some extent, deservedly so. The actions of several banks, both retail and investment, brought the global economy to its knees in 2008. Many of the banks were over-leveraged with billions of pounds worth of sub-prime and toxic assets on their balance sheets. At the same time, whilst a huge bubble was growing in the US housing market, bright minds were being recruited by the world’s biggest financial institutions and being remunerated with six-figure salaries and generous bonuses. Yet, this was not a revolution in creating wealth. It was entirely artificial and five years later, we the aftermath is still affecting the economy.

Small and medium sized enterprises are suffocating from a lack of credit within the system. Banks are being asked to meet lending targets, yet at the same time having to slim-line their balance sheet and maintain a higher capital ratio too. In 2008, banks weren’t able to function as banks because they lacked liquidity, now they are unable to lend because they need to hold on to their money.

This is where the problem lies; mainly in culture and language. Banks are perceived to conduits of free-market capitalism, unregulated machines that stuff money into the pockets of the rich. This is a ridiculous argument, yet it is frequently echoed by lazy politicians and journalists. The financial services industry contributes more than ten percent of the UK’s national GDP and employs well over a million people. Even after the crash.

Whilst regulation may be required, it is important to stress that more regulation is not the answer, simply good regulation.

EU regulation is an attack on the UK

The EU’s decision to introduce a Financial Transaction Tax as well as a cap on bankers’ bonuses is exactly not that: it is bad regulation. Whilst the City of London, the UK’s financial heart, has remained staunchly pro-EU, it has remained silent over these proposals. Make no mistake, when these were put forward, EU politicians were simply testing the water to see how keen people were for such measures, more will follow. This is simply an attack on Britain’s financial heart and the fact that the UK was the only country to oppose the measure for capping bonuses demonstrate that we are simply on our own.

It is also another example of the undemocratic nature of the EU. 26 nations, unelected by the British people, are forcing regulations on us that we simply did not vote for. This is before we question whether it will work or not. A similar financial tax introduced in Sweden in the 1980s simply forced all Swedish bond traders to move to London overnight. Who is not to say that the same will happen again this time? People argue that people would be unwilling to move away from London and the huge markets it serves, but why would an industry want to remain somewhere when the regulation is simply punishing and burdensome?

Bankers’ bonuses will drive up salaries, which are far more difficult to claw back than bonuses. In the event of another crisis, it will simply entail banks firing more people than addressing remuneration. In effect, they will be more unstable. Let’s not forget that banks are simply too clever, if there is a way of getting around it, they will do. People always tend to forget that these costs ultimately will be passed on to consumers i.e. you and I.

This is simply a bad policy.

What is most important that a British politician recognises this. For too long there has been no political capital in defending bankers. If this does become UK law, then MPs should realise that this is bad politics and not only will it cost growth, but cost jobs too. If a referendum does eventually happen, then people may realise that unnecessary rules and regulations from Europe are having a detrimental effect on the UK economy. The only way to avoid it, may be leaving.