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.