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Posts Tagged ‘FSA’

Banking on bonuses? Not for much longer

The problem with banks and the financial sector is that we need them. Who knows what might have happened if the government hadn’t stepped in to bail out the banks. And that’s one of the key arguments for continuing to pay bankers’ bonuses. If they left their jobs and the banks ceased to exist, we’d be looking at a very bleak future.

The truth is: ‘we need them’ and, what’s worse, they know it. As Frank Skinner said in a Times article: ‘during the crisis bankers will be thinking, “Don’t panic. The public have got short memories. Show them the slightest hint of recovery and most of them will forget their moral indignation and we can start where we left off – making the biggest splashes we can and not worrying about the ripples” ‘.

Despite the argument for continuing to pay out bonuses, a large proportion of the public are understandably angry that bankers are still receiving enormous bonuses. Not only are banks and the financial sector largely responsible for the current recession, but it is taxpayers who have bailed them out and who now pay their bonuses. However, things could be about to change.

The FSA is set to get powers, allowing it to ‘tear up’ bankers’ bonus contracts, especially for those taking reckless risks that threaten the stability of the financial sector. The new regulations will be found in the Financial Services Bill, which, if approved by Parliament, will apply to all British banks, as well as the British subsidiaries of overseas banks operating in the UK. Multi-million pound payments will be able to be blocked and fines will be imposed on banks who offer unjustified ‘mega-bucks pay-outs’.

Despite this impending regulation, not everyone thinks it will be successful. Sir George Mathewson, the former Chairman of RBS, has said that interfering with bankers’ contracts is a ‘dangerous route to go down’. Read the following articles that consider this contentious issue.

Bankers bonuses’ ‘will soar to £6bn’ after government bailouts and rising profits Times Online, Katherine Griffiths (21/10/09)
Bonus crackdown plans dangerous BBC News (16/11/09)
Financial regulation ‘has broken down’ BBC Today Programme (16/11/09)
Roger Bootle: Bank reform hasn’t gone far enough (video) BBC News (25/12/09)
FSA to get powers to tear up’ bankers’ bonus contracts Citywire, Nicholas Paler (16/11/09)
It’ll be tough for bankers on a £200k bonus Times Online, Frank Skinner (13/11/09)
Prince Andrew defends bankers’ bonuses even as economy stays mired in recession Mail Online, Kate Loveys (24/10/09)
Curb on bankers’ bonuses to be unveiled in Queens’ speech Mail Online (13/11/09)
Bankers warn laws on pay and bonuses will scare off talent Telegraph Angela Monaghan (13/11/09)
Labour to overturn bonus deals at risk-taking banks Guardian Patrick Wintour (13/11/09)
Banking on the State Guardian (17/11/09)
Queen outlines new banking laws BBC News (18/11/09)
Queen’s Speech: what the Financial Bill really means for bankers’ bonuses Telegraph, Tracy Corrigan (18/11/09)
Brown Puts Deficit Curbs, Bonus Limits on U.K. Agenda Bloomberg, Gonzalo Vina and Thomas Penny (18/11/09)
Queen’s speech 2009: financial services bill Guardian, Jill Treanor (18/11/09)

Questions

  1. What is meant by ‘regulation’ and what forms does it take?
  2. Why are banks and the financial services largely blamed for the current recession? Will financial regulation of bonuses prevent a repeat of the current crisis?
  3. What are the arguments for and against further regulation? Why does the former Chairman of RBS argue that cracking down on bonuses could be ‘dangerous’? Do you agree?
  4. Why are bankers paid so much? How is the equilibrium wage rate determined in this sector?
  5. Should bankers receive bonuses? Think about the incentive effect; the effect on productivity. What are the possible consequences for those working in banking of bonuses being reduced and possibly removed if they are deemed to threaten financial stability?
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A Rock and a Wreck

Northern Rock seems to have had a fixed place in the news for the past year or so. Unfortunately, the advertising it’s been getting hasn’t been positive. The usual picture was one of a Northern Rock branch and a few hundred people queuing outside, ready to withdraw their savings.

In the financial crisis, the banking sector has been at the forefront of economic policy and billions of pounds of public money have been invested in banks simply to keep them afloat and encourage them to keep lending. But now the government, in a measure approved by the European Commission, is considering selliing part of Northern Rock, by splitting it into a ‘good bank’, which will be returned to the private sector, and a ‘bad bank’, which will have to remain nationalised. This bad bank would gradually run down its assets and eventually be liquidated. Similar plans are being considered for the part-nationalised Royal Bank of Scotland and Lloyds Banking Group.

Northern Rock’s loan book will be cut from £100bn pre-crisis to just £20bn to ensure that a bank which enjoyed state support should not have “an unfair competitive advantage”. Savers with Northern Rock will find themselves in the ‘good’ bank, while mortgage customers with arrears and those who are regarded as risky, will be seen as ‘bad’ bank clients.

The buyers of these banks remain unknown. Tesco was considered to be a possible buyer of Northern Rock but has pulled out, with plans to build a new full-service bank itself. Established banks, such as Barclays, will not be allowed to make a purchase and the FSA has stated that standards will not be dropped to allow new competitors to enter the market, especially given that much of the banking crisis is due to poor standards and insufficient regulation. National Australia Bank, the owners of Yorkshire and Clydesdale, is a possible buyer, as too is Virgin Money, even though it would require new finance and possibly new partners. Some potential bidders may be ruled out by competition considerations. So let the games begin!

The following articles look at the banking situation and the possible developments.

Where Gordon Brown feared to tread, Kroes is ready to trample Telegraph, Alistair Osborne (28/10/09)
Lloyds eyes capital raising plans BBC News (29/10/09)
Tesco rules out Northern Rock takeover Guardian, Julia Finch (28/10/09)
EU approves Northern Rock split BBC News (28/10/09)
The Business Podcast: The break-up of Northern Rock Guardian (28/10/09)
Lloyds Banking share price could scupper offer SME Web, Roberta Murray (29/10/09)
Roll up, roll up, for the great bank sell off Independent, Richard Northedge (8/11/09)
Treasury says Northern Rock may lose savers as Government pulls out The Times, Francis Elliott and Suzy Jagger (5/11/09)
Union fears for 25,000 jobs as EU insists Lloyds and RBS must shed branches Guardian, Jill Treanor (3/11/09)
Decision time for Lloyds shareholders BBC News, Money Talk, Justin Urquhart Stewart (11/11/09)
The Business podcast: The break-up of Northern Rock Guardian (28/10/09)

Details of the European Commission ruling on the restructuring of Northern Rock can be found at:
State aid: Commission approves restructuring package for Northern Rock

Questions

  1. What started all the trouble at Northern Rock?
  2. What are the arguments (a) for and (b) against the break up of Northern Rock and the other banks that received state aid? Do you think the right decision has been made?
  3. The BBC News article ‘Lloyds eyes capital raising plans’ refers to 43% of Lloyds being owned by the tax payer. What does this mean and how has it happened?
  4. Why do you think Tesco has decided not to put in a bid to take over Northern Rock?
  5. Consider the potential bidders for these new ‘good’ and ‘bad’ banks. In each case, consider the (a) advantages and (b) disadvantages. Then, explain the type of take-over or merger this would be and whether there could be any competition considerations.
  6. One of the aims of recent developments in the banking sector is to increase competition. Why is this so important and how will it affect consumers and businesses?
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