Most politicians forget we are all bankers now, as collectively we own the largest UK banking group, and have various other shareholdings in the sector. The people are the true capitalists now.
I have argued before that we should immediately exempt most bankers from these allegations and remedies. The real targets are the directors and senior executives of the large integrated banks and the investment banks. They do earn large base salaries, and are used to substantial bonuses. Once paid as cash year by year, following changes these are now more likely to be paid as shares with a lock in period.
The prosecution case seeks to cut or limit these pay levels. The points made include:
The pay turns out to be subsidised by the state – directly in the case of state owned banks, and indirectly where a private sector bank enjoys past or potential support from the public sector if it gets things wrong.
The bankers’ rewards are inflammatory to others who earn much less.
The bonuses are based on taking excessive risks. If the risk works out the banker is rewarded. If the risk goes wrong someone else pays the bill.
The bankers earn much more than many of the businesses and home owners they are lending to.
The case for the bankers is infrequently and feebly put. It probably includes:
Banking is an international business. If the UK imposes restrictions on rewards here that are not imposed elsewhere, the business will shift to other centres.
Banks and bankers pay large amounts of tax which is crucial to public service provision in the UK.
Banks were encouraged to lend large sums to mortgage holders and businesses prior to 2007 by governments keen to promote wider ownership and economic growth through excess credit.
Banks expanded lending so much in direct response to central banks which set low interest rates to facilitate it, and under the watching eyes of regulators who said the risks the banks were running were just fine.
Banks need to offer large salaries to attract the best international talent.
Bankers are at risk, and some do lose their jobs when they fail to generate promised revenue.
High earning bankers pay more than 50 per cent of their money in tax, which can be used to reduce inequalities.
So should the UK government do more to change the culture and regulate pay in the banks? My answer is both Yes and No. I cannot accept public subsidy for large salaries and bonuses. That is why I opposed nationalisation of RBS, and why I still oppose the current pattern of remuneration in that state-owned bank. I would be happy for the top management to make large sums if and when they sell the bank back to the private sector at a profit for the UK taxpayers.
I am not happy about people who are effectively civil servants in a state bank being paid so much more than other public servants.
As I favour the split-up and the sell-off of differing businesses from within the RBS stable, talent can be retained and incentivised around achieving good selling prices for bits of the business. The talented executives would get their reward as and when they have transferred assets and activities successfully to the private sector at a good price for taxpayer owners.
I do not, on the other hand, favour more intervention on levels of pay in private sector banks not in receipt of state subsidy. It is true that all important banks can and should borrow from the lender of last resort, the Central Bank, in times of trouble. That is not necessarily a subsidy.
If it becomes, in effect, the offer of longer term subsidised capital to the private sector bank, then at that point there needs to be a negotiated conclusion on lower levels of remuneration in the troubled bank while it gets itself back into free standing profitable shape. The curious thing is that the last Labour government nationalised a bank or two, but endorsed high levels of remuneration and bonuses and signed off all the top executive contracts.
David Cameron’s incoming coalition was advised it had to honour the contracts. That all makes it difficult for Labour to complain about excessive banking pay, as they underwrote and approved it in several important cases. That is why this debate requires some straight-talking.
John Redwood is a Conservative MP. He was a Cabinet member during John Major’s government.