Home / Opinion / Banks aren’t charities, so why do we treat them that way?

Banks aren’t charities, so why do we treat them that way?

Banks aren’t charities and yet the non-stop bleating about bonuses and interest rates would make you think they should be run as though they were not-for-profits.

But banks aren't not-for-profit; they are proprietary firms with stock listings. They are there to make money, not to exist for the public good.

So what’s gone wrong?

Unfortunately during the past two years, the line between public and private has blurred, as evidenced by the Royal Bank of Scotland and Northern Rock, or by Citi and Bank of America in the USA, or HVB and Commerzbank in Germany, or UBS in Switzerland or …

The fact that these banks were bailed out by their respective governments, albeit temporarily in most instances, has blurred the media and public’s view of what they are there for.

The media and general masses now think they own the banks or, at least, have some skin in their game. And sure enough, in the case of RBS and Lloyds, the UK taxpayer does have some skin in the game: 84% and 43% respectively.

But that doesn’t mean the taxpayer runs the bank or that they exist for the public good.

In the case of RBS and Lloyds, they actually now exist in a shadowland where they are competing with openly aggressive trading firms like Goldman Sachs and JPMorgan, whilst having to conform with the requirements of the Treasury and UKFI.

This causes this schizophrenia between being openly competitive versus being humbly contrite.

What a pain.

But look at the bottom-line: these banks are still private firms with stock listings who have to serve their shareholder first.

That’s why they are paying bonuses, restricting lending, avoiding risk and being competitive.

Or that’s their thinking.

This is why we find it so hard to determine the right approach to bonuses and remuneration.

But take this a step further and we now have the journalistic and taxpaying community believing that they should somehow determine the interest rate setting policy and fees of the bank.

For example, over the weekend, the Beeb got itself into a tiz over credit card interest rates. The question posed is why, when the Bank of England’s interest rates are at their lowest levels ever, are banks charging the highest rates ever on credit card balances?

The answer is simple. The credit card portfolio runs as its own division with its own P&L. Today, more folks are defaulting than ever before. As the risks are greater and bad debts increasing, the interest rate has to rise accordingly.

The media and public then say: but you’re paying out all these hefty bonuses, what about us? Decrease the bonuses so that you can reduce our credit interest rates.

C’mon now and be serious.

The investment bank doesn’t subsidise the card portfolio. They are separately run businesses with their own P&L and both are tasked with making a profit, so both run their book as competitively and profitably as possible.

That’s why Barclays announced an increase in overdraft fees on deposit accounts just two days after saying that BarCap’s bankers would get an average bonus and pay package of just under £200,000 each for the 23,000 staff in that division.

You see the latter achieved their annual objectives and targets, so that’s why they deserve it.

And all of this is in a competitive battlefield where anyone can walk – both staff and customers.

But it ain’t that easy.

First, Barclays are justified in their actions because they never dipped into the taxpayer’s pocket, unlike RBS and Lloyds. Therefore, are RBS and Lloyds justified in providing bonus packages in the same way as Barclays? If they are privately held, shareholder-owned competitive banks, yes; if they are semi-nationalised, taxpayer-funded state-run banks …

In addition, the divisional components of the bank may be independently structured by their P&L but that argument doesn’t hold water when the bank would have gone under in the case of RBS, Citi and others, thanks to the failings of that very part of the bank that is now sharing the spoils amongst their staff at the customer’s and taxpayer’s expense.

It is this blurring of the lines between a nationalised business that should operate in the public’s interest versus the privatised industry that operates in the shareholders’ interest that is causing all of the media and general debate today, whether it is about bonuses, remuneration, profits, fees, interest rates or any other aspect of banking.

This half-hearted, schizophrenic shadow of an industry that doesn’t know whether it’s coming or going, and has no idea how to regulate itself or be regulated, needs a strong hand to steer it to an objective and vision for future operation.

That vision appears to be one of an independent industry, run under free market principles with shareholder focus as its central tenet.

If you don’t like it … lump it.

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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  • The bottomline is that the Banks went bust and the taxpayers rescued you. Without the rescue you would all be out of your overpaid jobs. Pensioners and taxpayers will be paying the cost of this rescue for decades to come.
    Banking needs to get bank to the basics. Only lending money that you actually possess. Investing rather than gambling. In short the Bankers should regain their integrity.
    If the Banks don’t mend their ways the public will surely exact their revenge through tight legislation.

  • Chris Skinner

    Hmmmm … only some banks were rescued by taxpayers, not all. There’s the rub …

  • If the governments had not stepped in on a global basis the whole banking system would have collapsed. The Banks are collectively responsible for this mess.
    There is no excuse. The Bankers knew that those derivatives and securitisations were inherently unstable.

  • Chris Skinner

    True … except that would we include Asian banks like ICBC, DBS, StanChart et al in this catch-all? OR are we only talking about the banks that created and then gained on the issues and QE (we know who they are) …

  • Damien

    Ah but they’re implicitly or explicitly guranteed by the taxpayer. No bank will be allowed to fail due to the role they play providing credit to the economy at large, no depositor will be allowed to lose money.
    Barclays’ bleating that it didn’t require a bailout is all well and good but we all know if it did they Gov would stump up the cash as its systemically important in a way that Woolworths wasn’t. This is why banks should frankly keep quiet.

  • Ian Kellam

    The whole process is clearly flawed. The banks, through poor management/ poor judgement or just plain old fashione greed took the world economy so close to collapse that goverments all over the world created tens of billions in support and liquidity. Tax payers will be footing the bill for decades and yet the banks are now moaning when any criticism is aimed at them.
    As for lumping it…why should taxpayers lump anything of the sort?

  • Chris Skinner

    So maybe the idea of yesterday’s commentary, where bonuses are capped so that the real casino capitalism plays out in a sphere outside core ‘too big to fail’ banks wins.
    That means you have a return to narrow banking and Glass-Steagall, but not Volcker’s version.
    Instead you have investment banks, working alongside commercial and retail banks, but the investment bank is limited in operation through caps, checks, reserves, etc.
    This means the real rock ‘n’ rollas are going to be in private banks, partnerships (like Goldman used to be), PE and hedge funds.
    Meanwhile, to Ian’s comment, taxpayers have to lump it right now as no-one has addressed these core questions … and they need to.

  • Chris,
    You wrote: “But that doesn’t mean the taxpayer runs the bank or that they exist for the public good.”
    Yes, the taxpayers do not run the banks, but when the politicians and the Fed here in the US created TARP, the politicians told the public: ‘we need to bail out the banks, or there is a risk the entire financial system will collapse. Trust us, it’s for your own good.’ Obviously pariphrasing here, but that was the message in not so many words.
    So you can’t blame taxpayers for being irate that the bankers are getting big bonuses. The taxpayers were told by the bankers and the gov’t that the taxpayers had to bail out the banks or the global economy would really go into the tank. So now the banks are an integral part of not only the financial system but also the global economy. OK, fair enough. But a bank can’t on the one hand claim how “important” it is and take public money, but then when the public disagrees with the way the bank is run, the bank claims “hey we’re private bugger off.”
    Bankers can’t have their cake and eat it too.
    Now we are at a point where the banks have crossed over into the hazy area of institutions that could be categorized as “public good.”

  • Chris Skinnerc

    I agree Greg … the thing is that banks are having their cake and eating it. Whilst banks sit in private sector hands, and are outside state control, they can quite happily say: “hey, bugger off”.
    The only way that can change is to nationalise the industry or create a regulatory environment that stops them behaving that way.
    Governments don’t want the former and are dragging their heels on the latter.
    Whilst the governments and regulators drag their heels, I would quite happily wave my middle finger, take the money and run …

  • Dan Newman

    In fact, ALL banks were bailed out by the government: some explicitly (eg, RBS, Citi) some in an under-handed way (eg, Goldman spared a haircut on AIG deals) and all others implicitly (the certainty that they will be bailed out should push come to shove, not to mentioned inflated spreads thanks to absurdly low interest rates).
    The bigger issue is that banks are private institutions vested with the public trust by way of the ability to create credit. Lastly, banks are in essence an oligopoly engaged in collaborative rent-seeking.