Financial Regulatory Forum

UK banks should use bonus cash to lend – Conservatives’ Osborne

By Reuters Staff
October 26, 2009

British opposition Conservative finance spokesman George Osborne speaks at a Reuters Newsmaker event in London October 26, 2009.  Osborne said that British retail banks should be stopped from paying big cash bonuses and use the money instead to support new lending.     REUTERS/Kevin Coombs (BRITAIN BUSINESS POLITICS)   By Matt Falloon and David Milliken
LONDON, Oct 26 (Reuters) – British retail banks should stop paying big cash bonuses and use the money instead to support new lending and contribute to an economic recovery, opposition Conservatives’ finance spokesman George Osborne said on Monday.

 

The Conservatives, well ahead of the ruling Labour party in opinion polls with a parliamentary election due by mid-2010, are starting to flesh out how they might govern Britain, cut back record government borrowing and engineer a stable recovery.

Getting banks to lend again is seen as key to fostering growth and bringing an end to the longest recession on record.

“I am today calling on the Treasury and the FSA to combine forces and stop retail banks … paying out profits in significant cash bonuses — that includes their investment banking arms,” Osborne told a Reuters Newsmaker event.

“Then the cash that would have been paid out should be put onto banks’ balance sheets explicitly to support new lending. This should be a condition of continuing to receive taxpayer guarantees and liquidity support.”

Osborne said laying out a credible plan to tackle Britain’s budget deficit — seen hitting more than 12 percent of gross domestic product this fiscal year — was essential if the economy was to recover and to retain market confidence.

The Conservatives want to cut back borrowing more sharply than current government plans to halve the deficit in four years, although the opposition have yet to give more details.

“We have never proposed a tightening of fiscal policy in this financial year,” he said.

“Tightening fiscal policy as the recovery gathers pace will help prolong the low interest rates that are doing so much to cushion the impact of the recession and bring about a recovery.”
BONUS CULTURE
Osborne said Bank of England Mervyn King’s idea of splitting banks into safe and risky activities was “strong and persuasive” although such decisions should be made at international level.

He said putting bonus pot cash at retail banks into lending “should be a condition of continuing to receive taxpayer guarantees and liquidity support.”

If banks wanted to pay bonuses to senior staff this year, they should be in the form of shares, he said.

The government took large stakes in several British financial institutions, including RBS and Lloyds, to help the sector survive the financial crisis and policymakers have called for an increase in lending in return.

“UK banks understand that stories about high pay and bonuses causes anger and concerns individuals,” the British Bankers’ Association said in a statement.

“However, the big bonus culture is not in retail banking but investment banks. Most retail banks are weathering the economic downturn well and have not used any taxpayers money.”

The G20 group of developed and emerging economies signed up to payment reforms last month, including subjecting bonuses to clawback and deferral — but investment banks are already sizing up big bonuses this year.

The Centre for Economics and Business Research said last week payouts in Britain would hit 6 billion pounds ($10 billion) in this year’s bonus round, up by half from 4 billion in 2008 but still well below the 10.2 billion paid in 2007.

Finance minister Alistair Darling has promised laws to end a “reckless culture” at banks and the FSA, Britain’s financial watchdog, has said it would take action against those that channel profits into bonuses rather than build up capital.

(Additional reporting by Christina Fincher and Kylie Maclellan; editing by Patrick Graham)
((adrian.croft@reuters.com ; +44 207 542 7947; Reuters Messaging: adrian.croft.reuters.com@reuters.net))

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