The Great Debate UK
By Antony Currie and Margaret Doyle
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
NEW YORK/LONDON -- Compensation for bank chief executives is creeping back to the bad old days. Sure, virtually all of them now pocket a smaller amount each year than they did before the financial crisis. But after a year or two of relative restraint, their boards are starting to favor them over shareholders again.
Brian Moynihan's pay package looks the most egregious: the Bank of America boss took home $10 million despite presiding over a $3.6 billion loss and negative total return of more than 11 percent. Goldman Sachs Chief Executive Lloyd Blankfein raked in 40 percent more than he did in 2009 even though earnings tumbled by the same quantum and total return was a piddling 2.5 percent. And while Barclays' earnings from core operations increased by almost a third, new chief Bob Diamond's 9 million pounds of total comp far outpaced that rate, jumping nine-fold from what he and predecessor John Varley received a year before.
Not all are so out of whack. JPMorgan has a better defense for Jamie Dimon's 20 percent bonus bump: while the stock was essentially flat, the firm's net income jumped by nearly half. Strip out lower credit costs, though, and the bank's core earnings actually dropped by 14 percent.
Today we are all used to an international trade in services. When you call up the bank, a contact centre agent in India probably answers the call. When you crash your car and file a claim, the claim form you painstakingly complete is scanned and sent thousands of kilometres away for processing. When you call to find out the next train to Cardiff, it’s not someone in Wales giving you the information you need.
This change in how services are delivered has become a part of everyday life. For many companies – such as banks – it went too far in the past decade. Many banks found that their customers were uncomfortable dealing with an agent in a far-flung location and it soon became a source of competitive advantage to answer calls locally. But those same banks advertising that ‘we answer your calls in the UK’ are all sending their IT systems offshore. The ‘offshoring’ continues, it is just less visible.
By Sanjeev Sinha
Media coverage of the banking industry was once confined to newspapers’ business pages, but has now spilled over to headline coverage. Recently the remuneration of bankers has been treated with even more interest than the salaries of top football players.
Yet while newspaper readers have become familiar with the LIBOR rate and discussions about cash reserves, there has been a long process of banks restructuring operations that has nothing to do with mergers or nationalisation. A behind-the-scenes revolution has been taking place, driven not only by the need for cost saving but, more importantly, to improve efficiency, and enable them to compete in global markets. Increasingly, banks have been looking at outsourcing a wider range of functions as a response to global market challenges.
from Reuters Investigates:
The U.S. mortgage business is a “mess” in need of overhaul, JPMorgan Chief Executive Jamie Dimon reckons.
(See our special report on Dimon today: "Jamie Dimon wants some R-E-S-P-E-C-T")
Of course, his own bank is the third-largest U.S. mortgage lender. And JPMorgan is sitting on billions in not just prime mortgages, but risky home-equity loans too.
from Davos Notebook:
Jim O'Neill, the Goldman Sachs economist who coined the term BRICs back in 2001, is adding four new countries to the elite club of emerging market economies. But does his new edifice have the same solid foundations?
In future, the BRIC economies of Brazil, Russia, China and India will be merged with those of Mexico, Indonesia, Turkey and South Korea under the banner “growth markets,” O'Neill told the Financial Times.
–Laurence Copeland is a professor of finance at Cardiff University Business School . The opinions expressed are his own–
Bank bonuses are in the news again, and once more we see the spectacle of the Prime Minister indirectly pleading with the bankers not to be too greedy. Note the contradiction in the government’s position: even though we own two of the largest and most culpable banks, we dare not impose explicit limits on their pay lest they decamp to places where the political climate is more hospitable and the regulators more tolerant. But although enforced limits are out of the question, it’s quite OK to pressure them by every other means – which, of course, raises the question: why should bankers be more willing to stay in Britain when their pay packet is limited by “voluntary” restraint rather than government intervention?
-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --
The "too big to fail" problem will be partly fixed in 2011. Global regulators should end up agreeing to make a select group of big global banks hold higher levels of capital. That will make them safer, while removing some of the benefit they get from being big. But eliminating the taxpayer guarantee enjoyed by large lenders will require more fundamental measures. That will take years to achieve.
Regulators everywhere agree that banks deemed too big to fail are dangerous. Because of their importance they enjoy implicit -- and sometimes explicit -- government support. As a result, large lenders tend to have higher credit ratings and pay less for deposits and wholesale funding. This encourages them to become even larger and more interconnected.
Broadly speaking, there are two ways to tackle this problem. One is to make big banks less likely to fail. The other is to reorganize them so that they can be allowed to fail without threatening the system. In 2011, regulators are likely to concentrate on the first option.
Ever since the financial crisis broke in 2008 some of the world’s major banks have their governments to thank for their survival. The fates of Royal Bank of Scotland or Citibank would have been much worse without large injections of capital from the UK and U.S. authorities. The UK government pumped more than £37 billion into its largest banks in the immediate aftermath of the Lehman Brothers crisis. Ireland took that a step further when it guaranteed all of its banks’ deposits and liabilities. This was affordable, the Irish government said at the time.
However, this policy failed spectacularly. Ireland’s bailout of its banking sector brought the country to the edge of bankruptcy and forced it to accept a 82 billion euro bailout loan from the IMF/ECB and the European Union. More than 30 billion euros of this loan is to re-capitalise the Irish banking sector and the rest is to shore up the state’s finances. The conditions of the loan mean that Ireland will have to implement harsh austerity measures for many years to come that will inevitably hurt growth.
Portuguese 10-year government bond yields have hovered stubbornly above 7 percent since the Irish bailout announcement, hitting a euro-lifetime high and giving ammunition to those who say Lisbon will be forced into a bailout.
– Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own. –
Supporting Ireland to the tune of a few billion quid must look like a no-brainer to the British Government. We should not make the same mistake as the Germans, who managed to get the worst of both worlds over Greece – forced by the scale of their bank exposure to support Greece, but providing the money with ill will, causing bitterness rather than gratitude – and now repeating the error in the Irish case.