From Nick Clegg’s website:
Liberal Democrat Leader Nick Clegg today called for the Government to issue a temporary guarantee for all deposits in the British banking system:
We are now in the eye of an economic storm. We have seen the dreadful effects of the bonus culture in the City that has led banks to take unacceptable risks for short-term gain ahead of long-term stability.
If we are going to reverse the greedy banking culture that went on for too long, we need to start at the top. This means an end to all bonuses for boards of directors in British banks that do so much to fuel short-term speculation. Giving them salaries, if necessary very generous ones, will create fewer risks in the future.
The financial system urgently requires some breathing space. British people need total reassurance that their savings are safe.
Read more on www.nickclegg.com
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All deposits? How does it feel to have a moron for a leader. Slap a government guarantee on all deposits with no cap and you will get zillions of funds thrown at UK banks from all over the world from investors arbitraging the bank deposit rate against the yield on gilts. The next thing you know the rate on gilts will shoot up so that the tax payer is paying more to finance the National Debt.
Getting rid of bank directors’ bonuses: As anybody who has ever worked in a bank will tell you you need the margin income from 100 loans at 1% to cover the losses froma loan write-off. And that is before you start paying the staff and operating costs. This means that the higher echelons of banking where these things are viewed on a macro-scale are all about risk minimsation. If a bank does well that is generally because it has managed its risks well. Bank directors should be paid bonuses for better performance, but the performance measure should give greater weight to long term profitability and minimisation of losses than to short term fee and commission based income, because the value of up fromt selling commissions may be reduced by later losses.
If it’s such a bad idea then why have the Irish and (effectively) French governments already done this?
Having worked in a bank, I can say that the directors didn’t care much for the bank’s long term future, its customers or its staff, just their pay and bonuses. To suggest that they may be worth “very generous” salaries is, I feel, a real mistake.
Did he check with Vince first? I guess not.
I’m afraid this is shallow populism of the worst sort that does little to address the real issues and, as MW says, will have all sorts of unforseen bad consequences.
We have banks that are too big to fail. We also have banks that are too big to save.
@neil bradbury:
From the FGD website
Le montant de l’indemnisation dans le système français est plafonné à 70 000 € par déposant (espèces) et à 70 000 € par investisseur (titres). Il est sensiblement plus faible, et proche de 20 000 €, dans la plupart des autres pays de l’Espace Economique Européen (comme les Pays-Bas, la Grande-Bretagne, le Luxembourg, etc.).
As for Ireland I have no idea what their sovereign debt rating is but given the size of the country and the fact that it is in recession I would have thought it would rank as AA at most and possibly AA-, so the difference between the country rating and the bank rating wont be that significant.
“If we are going to reverse the greedy banking culture that went on for too long, we need to start at the top. This means an end to all bonuses for boards of directors…”
What we actually need to do is recover the economic rent that arises from the banks’ ability to create deposits.
It is not the role of government to put arbitrary caps on private remuneration; the role of government is to prevent the private appropriation of public wealth.
We can’t blame the bankers for taking full advantage of a financial system that the fiscal failings of governments perpetuates.
Andrew,
Why do you think there is an economic rent in credit creation? Lending needs to be done prudently (no kidding), so prudential judgement does economic work.
The rent, it seems to me, comes in the form of bailouts. Seen over the whole boom-bust-bailout cycle, this does enable high dividends and bonuses at other times. We don’t notice because the rent is extracted at a different point of the cycle to the bailout.
More populist clap trap in an attempt to get air time. I genuinely worry for the first time whether he can with stand a General Election campaign. Two points.
1. Doesn’t he appreciate the difference between guarenteing all bank deposits if you are a small country like Ireland and a £1 Trillion plus GDP country like the UK
2. Ban Bonuses? how is a liberal party going to do that even assuming you could draft legislation to that effect?
The other day he was moaning about the EDF take over of British Energy and could make a single point other than it was French!
Like I wrote above the cost of borrowing for Ireland will rise. The credit deafult swap has risen 0.25%, and that increase will be reflected in the next round of financing of Irish government debt (a real increase in cost of funds). Meanwhile the Irish government is backing deposits being placed from non-Irish depositors, so we have Irish tax payers picking up the tab for a government guarantee for foreign money.
“Sept. 30 (Bloomberg) — The perceived risk of a bond default by Ireland surged to a record after the government said it will guarantee the deposits and borrowings of six lenders.
Credit-default swaps on Ireland’s government bonds jumped 27 basis points to 60, according to CMA Datavision prices at 6:10 p.m. in London, after earlier reaching an all-time high. A basis point is 0.01 percentage point.
Ireland said today it will guarantee all deposits, covered bonds, senior debt and dated subordinated debt of four publicly traded banks and two building societies. The government made the announcement after the country’s banking shares fell the most in a quarter-century yesterday.”