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Banks, Bonuses and Taxing profits !

By Tony Green - Mon 10th May 2010

The media has recently had a field day condemning the Banks for paying large bonuses to its staff and I can fully understand this condemnation - particularly in respect those Banks at the heart of the financial crisis and who were rescued by the authorities.

As one who relied on the Banking industry to provide my creature comforts for a number of years I think that someone needs to offer some justification for the Banks actions. Large bonuses, far in excess of those under discussion, are frequently paid to professional footballers and I read recently that a T.V. personality moved to another channel for £6million over four years which did not incur any special media attention !

So it seems that bonuses are acceptable for other professions but not for the Banking industry !

It also has to be remembered that by restricting the magnitude of bonuses paid to key Banking staff it will inevitably result in the loss of this talent to other industries and a subsequent reduction in Banking profitability as a whole. This would certainly be a bad thing at the present time. I think that the media have rather missed the point and have not really looked at the reasons why some Banks required assistance in the first instance.

To put the record straight, the main reason for the financial crisis was the authorities failure to properly regulate the Banks activities and insure capital adequacy. In the U.K. this role was undertaken successfully for many years by the Bank of England however this activity was relinquished and given to the financial services authority which begs the question whether this newly formed institution had the necessary expertise to fully regulate the Banking sector ? It has subsequently been proved that clearly they did not, and I wonder if they really had any idea what the Banks were doing and the inherent risks of their activities ?

If the authorities had regulated the Banks properly in the first place it is unlikely that any “bail outs” would have been necessary - the Banks were, after all, operating within the rules as they interpreted them.

The International Monetary Fund (IMF) has now produced a report recommending two new worldwide taxes on Banks . One of these would be a financial stability contribution to pay for the cost of future government bailouts for the system (do they know something we don’t?) and the other is a “financial activities tax” which would be levied on the sum of the profits and remuneration of financial institutions and paid to government’s general revenue. This strikes me as bolting the stable door after the horse has escaped and could also be viewed as a simple revenue raising activity !

This report also claims that the banking system has caused such acute damage to the world economy that firms will have to make a far more substantial contribution to public finances in the future.

Surely the simple answer is careful regulation, but not unnecessarily restrictive, and allow those Banks who are successful to reward their employees accordingly ?

Comment on this Blog

Underperformers should not be paid bonuses but be demoted or dismissed.! I think the media have not fully appreciated that many key Bank employees hold contracts with bonuses linked to specific performance targets and in areas of operation which did not directly contribute to their Banks losses. Banks who were "bailed out" would have been legally obliged to honour these contracts. Perhaps it would have been better to let these Banks fail, but that could be the subject of another (probably lengthy) blog. !
Tony Green - Wed, 12th May 2010
I agree with you wholeheartedly about rewarding the staff from a Bank who have exceeded targets and are in profit without having to have been 'bailed out' by the tax-payer. However, why are the staff from the Banks who HAVE lost huge amonts of money, and who the tax payer HAS had to bail out also being 'rewarded' with bonuses for being negligent and doing a bad job ? I doubt that the footballers or TV personalities that you mention would be rewarded if they provided their employers with similar poor service !
Simon Clark - Mon, 10th May 2010