Bankers under fire over 'business as usual'

Published on Tuesday 20 October 2009 22:07

BANK of England Governor Mervyn King last night hit out at the "business as usual" culture in Britain's banks.

In a high-profile speech to the CBI in Edinburgh, he criticised the lack of reform in the banking sector and warned against a return to the big bonus culture that has been blamed for threatening the safety of the financial system.

His remarks came amid an outcry over a report claiming City financiers are set to pocket bumper new year bonuses of more than 6 billion, 50 per cent more than a year ago.

"Rather than pay out dividends or generous remuneration, banks should use earnings to build larger capital buffers," Mr King said.

The governor called for a major restructuring of Britain's banks, warning the belief that regulation can prevent future failures "is a delusion".

Mr King set out the case for separating retail banking from riskier activities, such as trading in derivatives.

The bluntness of the governor's speech – and the astringent delivery to leading Scottish business organisations in the capital – will be widely seen as a warning shot across the bows of Royal Bank of Scotland, in particular, on the "business as usual" ethos in the banking sector.

Recent months have seen a return of proprietary trading activity and the bonus culture as if nothing had changed.

Earlier this week, RBS was forced to deny claims that some of its top investment staff could take home bonuses of 5 million at the end of this year.

Barclays, which has not received direct state aid, is also expected to offer large bonuses to its leading investment staff as it prepares to unveil profits of about 10bn.

Goldman Sachs, the US investment bank which employs 5,500 people in its London operation, has already declared it will pay an average bonus of 500,000 this year.

Earlier this month, RBS Coutts, the international arm of the Royal Bank of Scotland, suffered a major blow after losing a third of the workforce at its flagship Singapore office.

It was reported a lack of annual bonus prospects had been a key factor behind many leaving.

The departures came just weeks after former co-chief executive Hanspeter Brunner left to head-up rival Swiss bank BSI's Asian operations out of Singapore.

Mr King said: "It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place.

"It is in our collective interest to reduce the dependence of so many households and businesses on so few institutions that engage in so many risky activities," he added.

"The case for a serious review of how the banking industry is structured and regulated is strong."

He described the scale of support to the banking sector as "breathtaking".

It was now "not far short of a trillion pounds, close to two-thirds of the annual output of the entire economy".

Mr King's summation of this support was delivered with a piercing sting: "To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many.

"And, one might add, with little real reform."

He said it was hard to see how the existence of institutions that were "too important to fail" was consistent with their being in the private sector.

Encouraging banks to take risks that resulted in dividends and remuneration when things went well and losses for taxpayers when they didn't "distorts allocation of resources and management of risk".

He said the massive support extended to the banking sector around the world, while necessary to avert economic disaster, "has created possibly the biggest moral hazard in history".

Mr King set out the two approaches to the problem – regulatory change to modify the risks that banks were taking, and structural reform such as the return to "narrow banks" as advocated by the economist John Kay.

Structural reform, he noted, was considered by some as impractical. But, Mr King said: "What does seem impractical are the current arrangements.

"Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we are. The past two years have shown how dangerous it is to let bankers play with fire."

Whatever approach was adopted, he added, there was growing agreement financial institutions should be made to plan for their own orderly wind-down – "to write their own wills".

"I welcome that," he said, "but without separation of the utility from other components of banking (day-to-day business from more complex, risky trading], it will be necessary to develop detailed resolution procedures for a very wide class of financial institutions.

"The options may turn out to be separation or increasingly detailed regulatory oversight, with the costs that entails for innovation in, and the efficiency of, the financial system."

'7p ON TAX'

THE government may be forced to put 7p on the basic rate of income tax as part of its efforts to bring national debt back under control, according to a report published today.

Economic think tank the National Institute for Economic and Social Research warned that debt could reach 93 per cent of UK national income by 2015, leaving "a burden for our descendants" if it is not reduced.

Spending cuts alone may not be enough to deal with a structural deficit running at 6 per cent of GDP each year, it warned.

A 7p hike in the standard rate of income tax to 27 per cent – pushing individuals' bills up by as much as 2,600 – would raise revenue equivalent to 2 per cent of GDP, said today's report.

Similar sums could be raised by extending VAT to a wider range of goods, or by imposing a five-year public-sector pay freeze, or by a 10 per cent cut in public services.

Public borrowing ballooned by a further 14.8 billion in September.

The latest surge takes net borrowing to 77.3bn for the six months of the financial year so far – the highest half-yearly figure since Office for National Statistics records began in 1946.

Meanwhile, strong demand from people buying new homes helped mortgage lending to edge up by 2 per cent during September, figures showed.