Banks: too large to care?

The phrase “bonuses are back” should fill us all with disgust. The taxpayer’s money is being used to support an industry which is in turn paying out staggering amounts to its employees in compensation. Barclays Capital, Barclays’ investment banking arm has announced that it has made profits of £3bn on the first six months of this year. This implies an average pay out of £100,000 for the 22,000 people that work there just for this period.

We should not be fooled by the idea that because Barclays did not receive any funds from the government directly that these profits are only a result of their own ingenuity; the government has played a very active role. In order to understand why, we must return to the original reason why we bailed out banks such as RBS, that they were too big to fail. These banks were perceived to be too big to fail because of the potentially disastrous effect on the whole financial system a bankruptcy could generate. The failure of one bank threatened to tear down the whole financial system, and all the other banks with it.

The reason for this is the interbank market. Every day, in order to settle claims or to meet capital requirements banks lend enormous amounts of money to each other on the interbank market. The interbank market is a necessary tool for managing the capital requirements and liquidity of banks on a day to day basis.

This implies that the failure of one bank would mean large losses for other banks as the failed bank would default on their loans and other banks would no longer be able to borrow as much money on the interbank market.

A study published by the Bank of England in 2002 predicted that a failure of one large bank would not have devastating consequences on the financial system, that even in an extreme case of a 100% default from one large UK bank, the result would be insolvency in 4 additional banks. These banks would most likely be small banks.

However, last year we were dealing with multiple large bank failures in the context of a very weakened banking system. If the government had not stepped in, the results would have been truly devastating, even for Barclays. Many more banks would have failed and the ones that survived would have been severely damaged.

If this wasn’t enough to justify more humility from the banking sector, something popped out of the page whilst reading today’s Guardian article on the matter. The Guardian reports (emphasis added) that

“banks with major investment banking operations are benefiting from a reduction in competition, fees earned from governments raising money on the bond markets, and companies raising funds with new shares”.

So we learn that at least part of the profits earned today come from the fees on the billions of pounds of debt that the government had to issue, in order to save the financial system that is profiting from them doing so!

The bottom line is this: all banks have benefitted from the government bailout of the financial sector. Taxpayer money and the taxes of generations of future tax payers was committed to the banking system in order to save it from collapse. In the future we will have less investment in public services and pay more taxes for it, because of the money we have spent to save the financial system today.

Barclays, HSBC and any other banks that report profits this week say that they will not pay any bonuses until the end of the year. They should use the time remaining to think about better ways to use those profits rather than on bonuses and dividends. A very good use of it would be to contribute to paying down our now enormous national debt. We have seen that banks are too large to fail, but the question remains: are they are also too large to care?

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9 Comments

  • Roger Roberts 3rd Aug '09 - 11:11pm

    Every day I meet/hear the problems of people affected by the financial crisis – repossesions, unemployment, family breakdowns, mental health problems etc. Is there no moral code that influences the banks at this time?The suggested Barclays payout of over £100,000 to 22,000 employees makes no sense at all.

  • We should take our retail banking business to the mutual sector.

  • “The phrase “bonuses are back” should fill us all with disgust.”

    No it shouldn’t. Bonuses are in effect merely a form of performance related pay which has been something long advocated by the Liberal Democrats. Whether the performance is actual or illusory is the real issue but nothing wrong with bonuses per se.

    “Barclays avoided a direct government bail-out by attracting large investments from the Gulf. The speculation at the time was that the board preferred this approach because it would enable them to continue their bonus payouts without government interference.”

    And?

  • Matthew Huntbach 6th Aug '09 - 9:45am

    The recent economic crisis demonstrated that large bonuses for top bank workers exist for one reason – the job of banks is to transfer large amounts of money from one place to another, and if that’s your job, taking a small cut from those large amounts of money is a very large amount of money indeed for one person. It is clear from the way they are paid across the board that these are not rewards for exceptional performance, they’re standard for anyone lucky enough to be a member of the smart set that works in this sector. It’s clear from the fact that most of this smart set seems not to have predicted the crisis or to have made plans which would deal with it, that they are not the supremely clever people they claim to be as a justification for these very large payments to themselves. Sure, if your job is to decide on transferring a billion pounds to X or Y, it may make a million pounds difference if you choose right – but that does not mean you are doing anything more clever or deserving of highly paid reward than someone whose job is to make decisions over matters which involve much smaller sums of money. They are taking this money just because from where they are, they can.

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