Banking bonuses are like cockroaches. Nobody much likes them. They can do a lot of damage. And short of an all-out nuclear war, they appear just about indestructible. The 2008 financial collapse didn’t do anything to curb the way the financial sector rewards itself. Nor have attempts at greater regulation made much progress. Even higher taxes don’t work.
But how about people power? In Holland, ING was forced to abandon a bonus scheme after a Twitter-led campaign against the bank threatened to turn into a mass boycott. Banking pay, like just about anything, needs permission from society. Banks can’t operate unless millions of ordinary people are willing to put money into them and use them to shift funds around. It may be that only direct action from ordinary people can finally bring the banking industry back under control.
There is little question that financial-sector pay has got out of hand. The sector routinely pays its staff rewards that are far and above what other people earn, and which bear little realistic relation either to the success of the banks they work for, or to the contribution they make to the economy. Just take a look at the latest revelations about pay at the Royal Bank of Scotland (RBS). Last month, the bank revealed that it paid out around £1bn in bonuses. More than a hundred of its staff were paid more than £1m. This is despite the fact that RBS went spectacularly bust, is still majority-owned by the taxpayer, and is still losing money. It is far from alone. HSBC revealed that it paid 253 of its staff more than £1m last year, 89 of them in London. Right across the board, bonuses have bounced straight back to 2007 and 2008 levels.
There is nothing wrong, of course, with people earning lots of money. If they are working hard and creating wealth, they deserve it. But all the evidence suggests that the banking industry has become a cartel that operates against the public interest. The banks are too big, they take on too much risk, they require too much in the way of hidden subsidies from the taxpayer, and they pay themselves too generously. According to Harry Huizinga, an economics professor at the University of Tilburg in the Netherlands, 12 banks have liabilities of more than $1trn, and 30 have a ratio of liabilities to GDP in excess of 0.5 – meaning that if they go bust, they may well bring down the country with them. Furthermore, the same banks pay consistently lower returns to shareholders than banks that are smaller, and less systematically important. In short, the mega banks aren’t very useful to anyone, except for their lavishly paid staff. We’d be better off without them.
But how do we bring them under control? Regulatory initiatives seem to go nowhere. Governments don’t appear very effective – they are too easily brow-beaten by the argument that the banks are vital for the economy. So maybe it comes down to people power. In the example above, in Holland, ING last week agreed to scrap a bonus scheme that would have paid its chief executive, Jan Hommen, €1.25m. ING was bailed out by the Dutch government in 2008, and although it has since repaid e5bn of the money it received, there is still another €5bn to repay. The sober-minded Dutch objected to the sight of bankers who still owed the government billions paying themselves vast rewards. A Twitter-led campaign mobilised public opinion – people were threatening mass withdrawals from their accounts, creating the potential for a run on the bank. Although by last week only a few hundred people had taken their money out, it was enough to rattle ING. By the end of the week, it had decided to withdraw its bonus scheme, replacing it with something far more modest.
The footballer Eric Cantona tried something similar in France. At the end of last year, he launched the ‘Bank Run 2010’ campaign, which threatened a mass withdrawal of money from the banks. Tens of thousands of people signed up for the Facebook campaign, in France, Britain, the States and elsewhere. The French banking unions warned of an economic catastrophe if it happened. In the end, the event was a damp squib. Still, there are signs that things are stirring.
Ordinary people feel deeply uneasy about the way that the financial sector rewards itself. They don’t buy into the argument that the banks are engaged in a fierce war for talent that means they have to pay everyone huge salaries. And they suspect, almost certainly correctly, that the way the banks reward themselves makes the system more, not less, risky – and that they may have to end up paying for it.
Most of all, they feel powerless to do very much about it. But that, of course, isn’t really true. A bank such as RBS depends on its millions of retail depositors. Without them, it would be sunk. A pure investment bank depends less on ordinary customers, but there are not many of those left – and, in truth, the retail banks are the original source of the money the investment bankers play with.
The Cantona campaign didn’t work, but the ING protest was far more successful. If the idea of depositors mobilising against banks takes off, it could pose the most potent threat yet to the system. After all, for any bank there is nothing scarier than a run. Regulation won’t curb bonuses. It is unlikely that politicians or central bankers will manage to either. But people power might just do the trick.