What is it about banks?

This is information from Barclay's release of their pay data this week

Barclay's pay 2012
Pay band up to	# in Pay Band	Amount paid	As % of staff		Total received	% of total pay
25,000	71,581	1,789,525,000	49.17%
50,000	37,300	1,865,000,000	25.62%
100,000	22,766	2,276,600,000	15.64%	below £250,000
250,000	10,158	2,539,500,000	6.98%	97.40%	8,470,625,000	71.71%
500,000	2,440	1,220,000,000	1.68%
1,000,000	910	910,000,000	0.63%
2,500,000	373	932,500,000	0.26%
5,000,000	50	250,000,000	0.03%	above £250,000
6,000,000	5	30,000,000	~0.00%	2.60%	3,342,500,000	28.29%
Total	145,583	11,813,125,000			11,813,125,000

Most comment here has been focussed on the numbers who are still receiving more than £1 million in pay, even though the bank has been fined a lot for various kinds of fraud. But to me that is only part of the story. What is the more shocking is the sheer inequality within this company. As you can see, 2.6% of the people get 28.29% of total remuneration (it is probably more than that: I have assumed that everyone is at the top of their pay band: and there is no upper limit specified for those who get more than £5 million so I have assumed they all got £6 million. I have also included those who get up to £250,000 in the lower half of the table, though that is a truly enormous wage in a country where the median is about £25,000 per annum. Does anybody work 10 times harder than another? I don't think so. Or are some people 10 times smarter than others? I don't believe that either

We are often told that if the wealth was redistributed it would not make much difference to those at the bottom and so it is not worth doing. I think it is fairly easy to see that is not true if you look at those numbers. If the top 2.6% confined themselves to £500,000 each, everyone else could get an extra £10,250 a year: and they would still be getting 20 times what those on the bottom rung receive.

How is that sane? It is very likely that those at the bottom would spend the extra: and that would help the economy. It is extremely unlikely that those at the top spend their income, though: there is only so much you can spend, even if you are the greediest person on the planet. Course you can drive up the price of assets with all that money: but that isn't actually very helpful in terms of our economy, as we can all now see.

This is just one bank. Redistribution of the sort proposed would release £1,453,500,000 into the economy: it is not of the same order as QE to date: but it would certainly help

Edited by FionaK - 10/3/2013, 00:01

http://www.taxresearch.org.uk/Blog/2013/03...en-2000-a-year/

Richard Murphy has reworked the above on more cautious assumptions and concludes that on the most prudent estimate the pay increase for the majority would be no more than about £2000 per year. I suspect the truth lies somewhere in between. But even on the lowest estimate it is not chickenfeed

The Parliamentary Commission on Banking Standards has produced its second report.

www.publications.parliament.uk/pa/j...cbs/126/126.pdf

It is quite interesting and I wonder how it reaches the conclusions it does: presumably the "art of the possible" given the nature of our current government?

The point of these reports is to put in place structural reforms which aim to prevent another finanical disaster such as the one in 2008. The Commission do not think the government response to the first report is adequate, and hence this second report which considers the actions the government propose in response to the first.

It is clear from this report that the members are well aware that bankers are always crooked if they can be. For example, at the very start of the report, the first sentence of the introduction reads:


An immediate admission that the culture in the banks is bad and the problems are not down to a few individuals where such frauds as the manipulation of Libor etc are concerned. They say that they want the reforms to be durable and they identify the threat to that stability as coming from the banks themselves, who will most likely seek to undermine or get around the "ring fence". They note that attempts at such structural separation between retail and investment arms have been frustrated by the banks in the past and point to the experience of america to support that view


To my mind this is not a risk: it is a stone cold certainty. Yet the commission wants to give the bankers another chance. All they are recommending is that should there be a "disincentive" for them to do this in the form of a power to enforce institutional separation if they don't behave. They call this "electrification" of the ring fence, and they think it is important. To me it is long past the time for "threats": if we are going to deal with banks in this way, rather than by nationalisation, then we need to enforce that separation unequivocally. We have more than enough evidence to show that banks behave badly if given the chance: and that denying them that opportunity is a minimum requirement for effective regulation. I suspect it is the best they could get, but I have no faith at all that it will lead the banks to
.

The discussion of those "reserve powers" contained in this report reinforce my view that this is flim flam.

The first "reserve power" recommended is a power to enforce separation of a particular bank if it does not respect the ring fence. Enforced separation is going to require the regulator to jump through hoops and is ultimately decided by the Treasury, not by the regulator. The banks' lobby group, the BBA, have been whining that such a power increases uncertainty for them and that, in turn, makes it harder for them to raise money to lend to small businesses: like they are trying???? Self serving rubbish, IMO. The commission agrees, and notes the source of this objection and the basis for it: it quotes Sir John Vickers (hardly a radical in terms of his views on banks) as saying


Quite. Of course that is what they intend, and of course that is the basis of their objection: and that is precisely why separation should be complete and should be robustly enforced right now: not after they have again cheated and after a lengthy process to establish that they have. Nobody had any idea what they were up to when they caused the crash: or so we are told. Why would it be any different in the future?

Interestingly the banks themselves did not agree with the BBA position when asked as individuals: they said they supported "electrification". All that tells me is that it won't work, and they know it won't. I am too cynical to take at face value this quote from a banker:


Aye, right!

The government has now accepted this first reserve power, in principle: but has not agreed the corollary which is a system of independent review of the banks' compliance. So there will be rules but no enforcement, unless they change their minds: that always works so well, doesn't it? To be fair there will be annual reviews of the compliance by something called the Prudential Regulation Authority: but not the statutory independent reviews the commission recommends. It would be nice to be able to agree that second tier is not required:but the capture of the government by the financial institutions makes it impossible to have confidence in such a body. The regulators have not exactly impressed with their rigour and independence to date.

The second reserve power proposed is one which would threaten enforced separation across the banking sector as a whole, rather than individual naughty banks. The government has rejected that on the rather curious grounds 1. that they do not think the ring fence will fail, and so adopting that as a reserve power would run counter to that belief. 2. There is no need to legislate for this now as it is a decision better taken by parliament when the problem arises and 3. They don't think that is a decision for the regulator

The first is just mind boggling
The second is absurd
The third is, in the words of the Commission:


But, of course, there is as yet no agreement that there will be an independent review body: so the problem is not a straw man: it is real and created by the government itself

There is no better evidence for the view that this government (like its predecessor, IMO) is working on behalf of banks and not in the interests of those who elected them and who are having to pay the bill for the behaviour which the commission now seeks to constrain. Remember this is not even a proposal to separate the banks by statute: it is a proposal to threaten to do that if the banks do not voluntarily behave in a responsible fashion: like they have not done since 1866 and are never likely to do.

There is another telling paragraph in this report. The government said it wanted to deal with issues of
But in the proposed legislation none of that was there: only an objective of
. That is disingenuous. As we saw in the case of the ultra vires decision by IDS, the law relates to what is in the statute: an Act which specified that as the objective would provide no basis at all for the regulator to tackle the risk taking etc that got us into this mess. I expect they thought the commission wouldn't notice: luckily they did. It remains clear that the government deliberately sought to ensure that the banks would not be legally constrained in any way, so long as the put cash in the ATM's and did not lose the money in your current account. The Act would be spun as tackling the wider issues but would not actually do it. Now,having failed to smuggle in this attempt to undermine the whole point of the legislation, they have apparently agreed to include the other objectives: whether they will do so properly is an open question, since they obviously do not want to; and they have failed to publish a draft of the secondary legislation they propose at the same time as the bill. The conclusion is inescapable, given they also sought to put as little as possible into the primary legislation and to leave much to the same kind of statutory instrument that Ian Duncan Smith so abused wrt workfare. The Commission came to the same conclusion as shown by this statement


Neither the government nor the banks have any intention that the banks should comply with the "spirit", and they are doing their level best to make sure the "letter" allows them not to, so far as I can see. They also tried to dilute the commission's recommendations on exemptions, to the same end. And, as with the workfare regulations they have also tried to ensure that there is very little parliamentary scrutiny of any changes to the regulations which may arise in the future. That too has been noticed and they say they will change their proposals: we will see.The changes are not adequate in the Commission's view as is clear when they say


So that is all right, is it?

The report also notes that and earlier body had recommended that ring fenced banks (that is the retail banks we all use) should not be allowed to sell derivatives directly. The government wants the retail banks to be able to sell "simple derivatives" The Commission accepts there is a case for that so long as "simple derivatives" can be adequately defined (some hope); there are "adequate safeguards to prevent miselling"; and there are "limits on the proportion of a bank's balance sheet taken up by those derivatives". the mere list shows what is wrong with this and that is perhaps what the commission intend: but if they wish to be subtle in the hope that the government will get the message I think they are deluded: No, is the answer here. No room for compromise. In evidence to the commission one contributor put it more graphically


Yet the Commission wants to allow this, so long as there are safeguards: it is a measure of how far they are themselves in thrall to the banking industry, given that they started with a concern that the banks will use any wedge to try to circumvent the policy objective. Derivatives are surely just such a wedge.

The Commission does not think that investment banks should be allowed to own ring fenced banks directly: the government disagrees.

The Commission wants specific rules to prevent the shifting of liabilities between ring fenced and non ring fenced entities in a group. (amazingly, it thinks the risk of this happening is small, but worth explicit rules nonetheless). The government thinks there is no risk and so no need for a safeguard. In face of all the evidence of creative accounting and fraud designed to hide the reality of the bank's bankruptcy it doesn't seem all that unlikely to me: especially if an investment bank owns a retail bank, but there you are. In this connection the commission says:


I do not see how anyone can honestly disagree with that. Especially when some of these banks are to pay fines for fraud: how likely is it that those fines will fall on the retail bank and not the big money spinner, if they are free to decide who is liable? You decide.

This is a damning report. The government is doing it all it can to protect its paymasters: the Commission is alert to what they are up to but is not empowered to do much more than make a fuss: the bright spot is that public anger is enough to force the government to do something. It remains to be seen how far they can be forced to do something effective

On wider questions the report accepts that the risk lies ultimately with the public purse: they do not appear to have learned anything from Iceland and the outcome of the court case I outlined in another thread. That may be because international rules have changed for the worse since then; the judgement implied that was the case. If so, one might ask why those changes have been agreed; if not, or not completely, then I see no reason at all to accept any responsibility for failed banks. I do not think it is enough to talk of "bail ins", though those would be welcome if they ever come into being

Edited by FionaK - 12/3/2013, 01:35

Lest we forget.

This is a very clear summary of the different banking scandals which we have seen in recent years. As the author says, it is easy to lose sight of them in view of the ephemeral nature of the media and the fact that more keep coming out. So this is handy if you find yourself tempted by the bankers argument that we should stop bashing them and put it behind us

www.lrb.co.uk/v35/n13/john-lanchester/are-we-having-fun-yet

www.sciencedirect.com/science/article/pii/S1057521915001477

The link above is to a paper which is addresses the question of what banks do and what it means. It is the clearest explanation I have seen and it discusses different theories of the role of banks, and what they mean. The author claims and empirical approach, that is, he goes and looks at what really happens. This is in contrast to what we usually see: the construction of models based on untested assumptions. As an aside, he points out that economics has made no progress in more than a century, and to me that reinforces its status as a "social science" rather than the "hard science" it prefers to present itself as.

The paper discusses three different theories of the role of banks. That sounds daunting, but it is very easy to understand, with none of the usual equations or obfuscatory language. So it is accessible for we lay people. One may or may not accept what he says, but at least it is clear what we are talking about. That is progress in itself

Some of what he says is obvious once pointed out: but unsurprisingly, I missed some of the more obvious implications even though I had all the information.

As an example, in discussing the mainstream theory of banks as mere financial intermediaries ( as proposed by Krugman, amongst many others) he answers a question which has been lurking in my mind, and which I have struggled to conceptualise. Recently there has been much talk of "bail ins", eg in the context of Cyprus, and as a proposal for future action to resolve bank failure. For me, and for many others that seems wrong, but the gut feeling did not translate into the debate as conducted by the experts, and I could not really see why. It is obvious that most of us put money in the bank, for them to look after it for us. We expect it to be safe, and available for use when we need it. The financial crash showed that was not the reality, and in fact the guarantee of bank deposits is not given by banks, but by governments. And there is widespread talk of reducing or eliminating that guarantee on unclear notions that it is somehow unfair. As seen from the perspective of bankers, and governments, largely.

That is because those bodies take the view that you and me are lending our money to the bank when we put it there. So we are creditors of the bank and if they go bust we should lose our money. But you and I don't enter that contract at all. We do not get a profit from our deposits ( though arguably we could if interest rates were higher) and we do not expect to. We do not intend to risk our money when we put it in the bank: rather the opposite. The situation from our perspective is much more like giving our money to a lawyer. A lawyer is required to keep his client's money separate from his own. If he does not, he is breaking the law. If a lawyer goes bust the client's money is not affected because it is kept in a separate account and does not belong to him. It cannot be used to pay his creditors. It does not appear on his balance sheet, and it is not part of his business.

Though most of us think of our money in the bank in that way, the reality is completely different. The bank does not keep that money separate. It IS their money, from the point of view of the bank, and of the government. Were you consciously aware of that difference? I had a vague notion this was true but had not thought it through. The implications are rather important.

The paper is long and it covers a lot of ground. But it is an easy read. And it is very instructive. It is particularly chilling in its discussion of the regulation of banks and why the much vaunted new arrangements under Basel will not work. I urge you to read it.