Banks to pay out billions in bonuses
The government has become reconciled to British-based banks paying out bonuses running to many billions of pounds in the forthcoming bonus round. After weeks of talks between ministers and senior bankers, the best that ministers are hoping for from the banks is a statement from them - possibly at the end of next week - that they will pay out less than they would otherwise have done.
"They are looking for some words from us that prove that the negotiations have achieved something," said a senior banker. "I fear however that there may be more spin than substance to what we say." A member of the government said: "We have never said that we want to see the end of big bonuses because we know that is not deliverable."
Investment banking has been a less profitable business for many banks in 2010 than it was in 2009. So bonuses were expected to decline in any case. Royal Bank of Scotland may pay nearer £1bn in bonuses than last year's £1.3bn. Barclays may award less than the £5bn to £6bn in salaries and bonuses that its results for the first nine months of 2010 indicate it would pay out to the 25,000 employees of its investment bank, Barclays Capital. In the case of Barclays Capital, many of its employees are based outside of the UK: it has a huge base in New York, having bought the rump of Lehman in 2008. Even if bonuses are cut, investment bankers won't necessarily be worse off, because many of them have enjoyed rises in fixed salaries of between 20% and 40%.
"It's well known that the pay of investment bankers has been reweighted towards salaries and away from bonuses," said the senior banker. "So even if bonuses are cut, the total pay of many bankers won't fall."
Another banker said: "the total amount we pay out in bonuses will look huge to most people. Even if we pay out less than the £7bn or so it was estimated we paid in 2009, we are still likely to face criticism".
The Chancellor, George Osborne, recognises that Royal Bank of Scotland, Barclays and HSBC - which are the main payers of bonuses among British banks - operate in a global market, and cannot afford to pay significantly less than their overseas competitors.
The banks argue that they would lose staff essential to their profitable operations if they fail to pay more-or-less the going rate.
To take the sting out of criticism of the substantial rewards for bankers who are widely blamed for the recent savage recession - and whose organisations are only afloat because they have been rescued by loans and investment from taxpayers - the government is looking for the banks to make new commitments to provide additional credit to small businesses.
The hope of Mr Osborne and of the Business Secretary Vince Cable is that the banks will make binding promises to increase lending to smaller businesses and charge those businesses less for credit.
"The Governor of the Bank of England and the Chancellor are concerned that banks' understandable and sensible desire to shrink their balance sheets is depriving credit-worthy businesses of essential finance," said a government source. "It's really important that the banks are seen to be making a contribution to the recovery of the UK economy."
Ministers are hopeful that the banks will sign up to a meaningful lending pact, but it is by no means certain. "The deal is certainly not done and it may never be done," said a member of the government. One problem is deciding how much each individual bank must commit to lend.
"The banks in general understand that they must be seen to be lending enough," said a banker. "But when capital is in short supply, it is quite difficult for a global bank like Barclays or HSBC to choose to devote a substantial amount of resource to the relatively risky and low margin business of lending to smaller UK businesses, when there are more attractive opportunities elsewhere in the world."
As and when the banks issue their statement on lending and bonuses, they are also likely to say that they support David Cameron's plan to create a so-called Big Society bank using the proceeds from customers' dormant accounts (or funds left untouched by depositors for so long that they are unlikely ever to be claimed). "The only problem we have with the Big Society bank is that we are not completely sure what it is going to do, though the idea of using the funds for community projects seems a good one as a general idea" said a banker. The negotiations with ministers on a bonus and lending pact were started by John Varley, who has recently stood down as chief executive of Barclays.