Bill Jamieson: No sign of a brave new world for banking

Published on Thursday 2 July 2009 21:35

ONE flicker of hope in the darkest hour for Scotland's banks earlier this year was that a new era and a new culture would emerge from the ruins.

The rampant bonus culture that so distorted banking operations would be a thing of the past. And a new recovery and regulatory regime would light the way to recovery.

Six months on and the signs of a new culture and a new era within the two giant banks rescued by taxpayer intervention are not encouraging. The banks may be "past the worst" of a financial crisis that has blighted the world economy. But that only begs searching questions as to why the bonus culture seems to be roaring back.

At RBS, chief executive Stephen Hester has bowed to pressure from institutional investors to defer part of a controversial 9.6 million pay package. The package, which unleashed a storm of criticism last month, comprised a base salary of 1.2m, an annual non-cash bonus of 2m and "long-term" (three-year) share and stock options of 6.4m, the first tranche of which would be activated when RBS shares hit 40p. All this was on top of a "golden hello" of 10.4 million RBS shares granted to Mr Hester to lure him on board.

Since this pay deal was agreed by UK Financial Investments, the body based in the Treasury charged with safeguarding the taxpayers' 70 per cent stake, it barely seemed worth arguing over. But the Association of British Insurers, representing some of the bank's biggest instructional shareholders, sought a deferral of the bonus part of the package. Mr Hester has now agreed to a two-year deferral.

What on earth was Mr Hester – and UKFI – thinking of when this package was first agreed? It dashed the hopes of many who had been looking for a clear culture change at the top. And it marked a golden opportunity lost for the new head of RBS to demonstrate leadership.

A clear declaration to forego bonuses until a firm recovery was in place would have hugely enhanced Mr Hester's standing with staff, shareholders and customers. It would have helped in rebuilding public trust and confidence in the bank and set an exemplary standard of leadership. Instead, it looked like the return of "same old", obscuring the positive steps Mr Hester has taken to scale down the bank's huge balance sheet and to de-leverage.

And, unintended or not, it has been seen to set the seal of approval on the return of giant bank bonuses. Indeed, bonus packages for investment bankers are as high as ever, protected by the safety net under the state-owned banks. And my authority for this bleak assertion is none other than the Bank of England's former deputy governor Sir John Gieve, speaking in Edinburgh last month.

As for the emergence of clearly focused new banks from the rubble and with fresh leadership and clarity of purpose, the signs here are not encouraging.

The future shape of Lloyds Banking Group, created by the government-supported "merger" with HBOS, looks highly uncertain after a speech this week by Neelie Kroes, European Competition Commissioner. She said there was a "clear case" for the Commission to follow its rules on state aid for UK banks. "This means restructuring must follow rescue aid... Banks cannot be rescued for ever. They need to restructure to have a sustainable business without relying explicitly or implicitly on another bail-out."

This is seen as a warning that the semi-nationalised RBS and LBG may be required under EU competition rules to dispose of significant parts of their businesses. Some believe Lloyds could be forced to sell core businesses such as Scottish Widows Insurance and Insight Asset Management to qualify for state aid, and could even mean that Lloyds would be forced to sell the retail operations of Bank of Scotland.

So much for assurances from the Prime Minister after a visit to Brussels last month that he had seen off the EU's regulatory writ to order UK bank asset disposals. More immediately, the speech casts big doubt on Lloyds Banking Group's integration programme involving the loss of thousands of jobs – another 2,100 job losses were announced this week. Some of this could now be unpicked by EU diktat.

The responsibility for this mess is ultimately traceable to the government's decision to suspend UK competition rules to allow the "merger" to take effect – a move that this newspaper vigorously opposed at the time. Now it is coming back to haunt the bank and the government.

LBG chairman Sir Victor Blank, party to the discussions with the Prime Minister, has already announced his resignation. Now the heat is turning up under chief executive Eric Daniels.

Yesterday the Financial Times, in its influential Lex column, rounded on Mr Daniels, saying that he bought HBOS with inadequate due diligence, failed to spot the dangers lurking in its books and placed excessive faith in the government's waiver of competition rules.

"The new chairman, whether Sir Wyn (Bishoff] or someone else, must find the courage to tell Mr Daniels' supporters in Downing Street and UKFI that they must now cut him loose... Gordon Brown should never have promised the competition waiver. Mr Daniels should never have believed the Prime Minister could deliver it".

I hear from within LBG that senior executives have been stretched to the limit on the integration, that large parts of the operation are gripped by uncertainty and that morale is very low. For every redundancy announced there are dozens of cases where existing staffers have been told to reapply for their jobs.

Superimposed on all of this is the raging spat between the Bank of England and the FSA over regulatory powers, continuing confusion over the agenda, structure and brief of UKFI and no consensus on splitting retail and investment banking.

Six months on, and what a mess it looks. Where is the leadership in banking we so critically need?