Bonuses: Bankers should be put in the bonus penalty box for 2010. The industry has lost credibility because of its crass approach to pay in 2009. To get back on the front foot, compensation in the current financial year needs to be much lower. Governments and regulators should make this happen — and do so quickly. Delay will just store up trouble for everybody.
The public is now so hostile to bankers that there is a risk of bad regulations being foisted on the industry. The backlash has already produced the ill thought-out “Volcker rule”, which would prevent US banks from engaging in proprietary trading. If bankers' greed is not checked quickly, the bonus row could poison the pay round at the end of 2010 in the same way that it did in 2009. So long as this dispute goes on, every word uttered by any banker — however sensible — will be heavily discounted.
The way forward is take the whole issue off the table, by making sure that pay in 2010 is meaningfully lower than it was last year. Unless profits collapse — which is possible — the industry isn't going to do this on its own. Some senior bankers understand the political benefits of reining in pay, and possibly also the advantages for their shareholders. But nobody is going to act unilaterally. They are too scared that rivals will just poach their top people. Meanwhile, they argue that multilateral action orchestrated by the industry would flout anti-trust laws.
That's why the chairmen of two leading banks have privately called on the US and UK governments to organise a co-ordinated crackdown, Reuters Breakingviews has learned.
Although political logic is the main reason for restraining pay, there is also a technocratic reason. The new worldwide regime for capital and liquidity is still being cooked up in the Basel kitchen. While the precise conclusions are not known, the outcome will almost certainly be significantly higher capital ratios and fatter liquidity cushions. Governments can therefore quite reasonably argue it is necessary for banks to retain earnings in 2010, so that there isn’t another shock to the industry when the new capital regime is introduced from 2012.
