Sunday 17 January 2010
Oversized bank bonuses: classic case of overcharging
Half the world, it seems, is at war with bankers over the issue of the bonuses they insist on awarding themselves, come good times or bad, solvency or bankruptcy. Yet, just about all of the suggested remedies to prevent this grand rip-off seem to be missing the point and do not really go to the heart of the issue. In essence, this is that if banks, unlike most other commercial organisations, can afford to dole out vast sums of cash to their (often undeserving) executives, then they must be overcharging for their services. Either that or they are ripping off their shareholders - or more recently, the taxpayer.
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Oversized bank bonuses: classic case of overcharging
By ANTHONY ROWLEY
15 January 2010
Half the world, it seems, is at war with bankers over the issue of the bonuses they insist on awarding themselves, come good times or bad, solvency or bankruptcy. Yet, just about all of the suggested remedies to prevent this grand rip-off seem to be missing the point and do not really go to the heart of the issue. In essence, this is that if banks, unlike most other commercial organisations, can afford to dole out vast sums of cash to their (often undeserving) executives, then they must be overcharging for their services. Either that or they are ripping off their shareholders - or more recently, the taxpayer.
Consider what would happen if, say, an electricity or gas utility - or an oil company for that matter - were to start rewarding its executives with riches beyond the dreams of avarice in the form of bonuses, almost irrespective of the company’s performance.
There would pretty soon be a public outcry and the offending utilities might well be ordered to reduce charges - or maybe to use their money to step up capital investment and the quality of service to consumers. There might well be a monopoly investigation too to determine whether the providers of these services were operating a cartel that restricted or prevented price competition.
Yet, banks, it seems, are immune to such disciplines. Instead, the likes of British Prime Minister Gordon Brown propose a special tax on banks’ bonus pools while French President Francois Sarkozy and German Chancellor Angela Merkel show sympathy with the idea, as does US President Barack Obama now.
This is fine (assuming it can be implemented effectively) from the point of view of clawing back taxpayers’ money that has been poured into banks, ostensibly to get them lending and economies moving again, although in fact much of it is financing bonus payouts. But neither a bonus tax nor an international tax on financial transactions, which is also among the proposed remedies for bankers’ bonus mania, addresses the fundamental issue of bank charges and the pervasive impact that these have throughout an economy.
If banks are over-charging for their services - be it in investment banking, commercial banking, private banking or whatever - it stands to reason that the ultimate loser is the consumer. A company that overpays a bank in return for services ranging from a straight loan or bond issuance to financing a takeover or arranging some other form of restructuring is hardly going to absorb the inflated cost itself. It will be passed on to the consumer. The only people who cannot pass the buck are personal borrowers.
The pricing of all bank transactions needs to be investigated, as does the matter of why there appears to be so little price-competition among banks. A major task admittedly, but probably little more complicated than pursuing a bonus tax or a global financial transaction tax. The authorities have a duty to the consumer in this regard. Shareholders as a class can probably be trusted to take care of their own interests and to demand larger dividend payouts if they feel that bank executives are creaming off most of their inflated profits. Consumers, who do not operate as a homogeneous class like shareholders and thus lack organisational representation, are at the mercy of banks.
Regulators are fixated with issues such as banks’ capital to asset ratios, reserve provisions, the counter-cyclicity of capital building etc, and there is obviously a sound case for ensuring that these are adequate. Yet, they rarely, if ever, address the issue of bank charges. There are wider issues at stake too. The most obvious of these is whether banks, which are at the heart of any financial system, have just grown too big for the size of the economies in which they operate. Their sheer size can be maintained only by high charges. There is good empirical evidence to suggest that this is the case.
The financial sector has overtaken the industrial sector in size, not only in the offshore financial centres of Asia and elsewhere but also in the United Kingdom. A behemoth of that size can obviously destabilise the economy in which it operates - witness the fact that virtually all trade transactions, domestic and international as well as industrial production, ground to a halt in the aftermath of the recent global financial crisis.
Maybe it is time to downsize the sector by official fiat, and not simply focus on those institutions that are deemed to be ‘too big to fail’. Controlling bank charges would be a very effective way of bringing about such a shakeout. A US administration official is reported to have remarked that ‘a good crisis should never be wasted’. Now that governments have become so heavily involved in the banking sector in the wake of the financial crisis, they should not waste the opportunity to tackle why bankers can reward themselves so lavishly.
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