Make banks back bonuses with new capital
Let the banks pay their inflated bonuses – but force them to back each £1bn awarded with another £1bn of new capital. It could be a better brake on bonuses than a windfall tax on the banks or higher income tax for the bankers.
Banks seem determined to carry on paying jackpot sums, despite the strictures of ministers, accords from G20 governments and opposition by their state shareholders and the taxpayers who rescued them. They really haven’t got the message that the banks exist only because government bailed them out: 12 months later they have resumed business as usual, citing commercial pressures for paying £1m-plus bonuses.
Well let’s test how commercial these payments are by asking the banks to value the cost of their capital. If they are prepared to put up an extra £1bn – and are strong enough to do it – they can proceed with the £1bn bonus payments. If they are not, then perhaps that means the payment should never have been contemplated.
Bankers already face 50 per cent income tax from 2010 – but so does everyone else earning £150,000, so that is not a tax on the Square Mile. Anyway, taxing the recipients does not deter employers from making payments. A windfall tax on the banks might do that, and can be directed solely at the financial sector, but it hits all banks, not just those rescued by the taxpayer, and hits banks that need strengthening.
The concept of making banks put money aside is not new. During times of excess credit they were told to make special deposits at the Bank of England to curb their lending.
Telling them to match their bonus payments with a special deposit could be one way to curb bonuses now, but it would also leave banks with less cash to lend to needy businesses. Forcing them to match payments with capital actually strengthens the banks’ balance sheets, allowing them to take on more savings for relending as well as providing a cushion against future bad debts and write-downs.
Matching the bonuses pound for pound with new capital has a neat simplicity but perhaps only 50p of new capital would do the trick – or maybe it would have to be £2 for each pound paid out. But whatever the ratio, the bank would be better capitalised and the regulators might decide that for banks with a threshold of, say, 13 per cent equity to gross assets, no additional capital would be necessary.
Where would the banks find this capital? Well issuing free shares as bonuses does not solve the problem: it increases the share base without adding to reserves. But the banks could use profits to boost their capital or could sell new shares to investors. And if existing shareholders had to dip into their pockets to provide the capital – or it they thought their dividends were being held back so bonuses could be paid – they would do a better job in telling bank boards to show restraint (and common sense).
Of course, the banks could ask the bankers to provide the capital themselves – allowing them a £1m bonus (deferred for three years and paid in shares) so long as they provide the capital backing by buying £1m of new shares too. That would really make the individual bankers think whether they are worth the payment.
