It took years for the City’s bankers to shed their post-crisis bogeyman status. This year’s bumper bonus season threatens to revive it.
The UK’s big four high street banks report full-year earnings over the next week. Analysts anticipate £34bn in pre-tax profits between them, according to Visible Alpha data. And almost as intense as the scrutiny of cost-to-income ratios, net interest margins and returns on invested capital will be the focus on bonus pots.
The timing is toxic. Against a backdrop of soaring inflation, falling real wages and a cost of living crisis, banks are unveiling the sort of payouts that prompt a run on champagne inside the Square Mile.
Unlike in the financial crisis, the economic malaise cannot be laid at the door of the banks. And their profits are thanks to a far faster recovery than anyone anticipated during the first year of the pandemic, when Lloyds, NatWest and Barclays took £12.2bn in writedowns and HSBC another $8.8bn on top.
But they are nonetheless the beneficiaries of a wave of public money that has sloshed through markets over the past two years. That kept the loan losses down and helped drive the rebound that is leading to margin-boosting interest rate rises now. In the meantime, ready access to cheap credit enabled an M&A boom that sustained investment bankers from September 2020 through most of last year.
It is not that the banks profited at the expense of the public. But by paying big bonuses at a time when many people are struggling with affordability, the London-listed banks risk the perception that they are profiting while the people they serve suffer.
This is awkward, coming after a period where the UK banks actually managed to appear more restrained — particularly when compared with the private equity free-for-all. Since 2014, the EU bonus cap has constrained the excesses of investment bankers’ pay to twice their salaries, while seven-year clawback periods for senior bankers put something of a dampener on spending plans.
It helps too that the big employers of investment bankers tend to be Wall Street lenders which attract less UK press attention for their pay rises than the domestic ones. NatWest has retreated from the investment bank that almost brought its forerunner RBS down during the financial crisis. HSBC maintains its investment bank, but has cut it back.
Meanwhile, personnel changes add to the sense that London’s banks have become more boring. Lloyds last year replaced the flamboyant António Horta-Osório with the understated Charlie Nunn and put him on roughly 20 per cent less pay. At Barclays, the UK’s most prominent champion of investment banking, Jes Staley, is gone. The bank’s strategy under successor CS Venkatakrishnan may stay the same, but with the former chief risk officer now in the chief executive’s office, some change in tone seems likely.
But last year was far from boring in banking. Finance was booming. Pay across Wall Street’s big banks increased 15 per cent. Bashing the banks for making good profits during a good year is unreasonable (even if sometimes it does approach a national sport). Shareholders will benefit. So too should staff.
The problem comes partly from Andrew Bailey, whose recent comments on wage restraint from workers echo tin-eared bankers of the financial crisis years. Ignore the economics of whether one-off bonuses contribute to the sort of wage-price spiral Bailey wished to avoid. The optics of the Bank of England governor telling workers to practice prudence before the financial sector goes and gorges itself are unfortunate.
It may be a political issue most easily solved by the banks’ bosses, as their companies’ most prominent representatives, showing restraint with their own pay, as they did in 2020. They should avoid assuming that these things blow over quickly. Eleven years ago, then-Barclays boss Bob Diamond told MPs ahead of a bumper bonus season that the period of “remorse and apology” by banks should be “over”. It is safe to say others disagreed.
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