Breaking the bank
Anthony Jenkins, the retail banker who succeeded Bob Diamond as the Chief Executive of Barclays Bank, has rightly been criticised this week after the bank announced that it had increased its bonus pool when profits were falling and the bank is pushing through large cuts – 7,000 people – in retail banking. You judge a system by what it does, not what it says it does, and this decision spoke volumes – yelled it from the rooftops, really – about who benefits from the Barclays’ banking system.
Ruth Sunderland spells out the argument at the Mail’s This Is Money column:
Investors, who supported him [Jenkins] with £5.8bn of new capital last year, have been shabbily rewarded with a dividend that amounts to far less than the bonus pool. Thousands of loyal employees, many of whom have tried to serve customers well in the face of the bank’s problems, are being told to ‘go-to’ the job centre.
As for customers, they should be pleased about the branch closures, because they can do their banking on PCs and smartphones ‘when it’s convenient for them, rather than when it’s convenient for us’. Which is fine, unless you are a customer who does not wish to bank online, possibly because of the compromised state of the industry’s IT systems.
Nils Pratley – the Guardian’s financial editor – had this to say:
The mystery in the tale of Barclays’ latest bonus bonanza is that institutional shareholders are not screaming their complaints from the rooftops. Give it time. …
Many would agree with the Institute of Directors, hardly a cockpit of Marxist fury, that capitalism isn’t working at Barclays. Shareholders will get £859m in dividends and staff, chiefly in the investment bank, will collect £2.4bn in bonuses after a year in which profits fell steeply and the bank once again failed to achieve an adequate return on equity. As the IoD correctly says, the bank is being run for its staff, not its owners.
Of course, Barclays is probably unique, even in the banking system, in having had to commission a high-powered review that criticised its internal culture.
The moral of this story? There are probably two.
- That the only way to create a culture of integrity at a retail bank is to divest the investment bank. We’ve seen exactly the same problem at RBS recently, with Ross McEwan saying that he needed to match the global market prices for investment bankers if he wanted to keep them. All this talk rests on the notion that investment banking is profitable in the long-term, which is true if the rest of us pay for their losses.
- That changing an organisational culture takes a lot longer than people think, unless you’re ruthlessly single-minded about it. It also involves short-run cost, as the organisation has to unlearn old behaviours and learn new ones. Bob Diamond and Ricci Rich may not be at Barclays any more, but that culture, which I wrote about here, is still in the air.
Of course, breaking apart retail and investment banking is also the only way to de-risk the banking system, as any number of sensible commentators have pointed out, and the Government-sponsored Vickers Report almost recommended.
But it’s not enough, as we know from watching the way Lloyds incentivised staff to mis-sell to its retail customers even after the financial crisis, or RBS has abused its business loan book. Lloyds Chief Executive took his bonus despite these abuses, which had happened since he became Chief Executive. At least Anthony Jenkins chose to waive his, although a large chunk of shares is due to come his way, which will reduce the pain.
Lobbying against change
At the moment British banks have until 2019 to “ring-fence” their investment banking arms, which of course gives them plenty of time to pursue their favoured lobbying tactics.
These are the sort of things you can afford to do if you have the high profit margins associated with oligopolies. First, you make unevidenced claims about the value of the banking sector to the economy as a whole; second, you bury legislators in mountains of detail about the workings of any proposals for reform, thereby increasing the cost of changing the law; and third, you schmooze politicians relentlessly, since they are generally turned to stone by the reflection from large amounts of personal wealth (Ed Miliband shows signs of escaping this Medusa-like curse).
This appears to be true even when they know that this wealth has been accrued by extracting wealth from the rest of us, rather than producing anything that is socially useful.
The answer lies in some systemic changes that reduce the scope of the banks to make monopoly profits – effectively by requiring them to pay for publicly provided services that they get free at the moment. But that is a story for another post.
The picture at the top of this post is in the public domain.