Wednesday 22 November 2017

We're behind the curve in curbing banker bonuses

PAY YOUR WAY: Bank of England governor Mark Carney wants bankers to defer the receipt of part of their bonus for several years. Photo: Simon Dawson/Bloomberg
PAY YOUR WAY: Bank of England governor Mark Carney wants bankers to defer the receipt of part of their bonus for several years. Photo: Simon Dawson/Bloomberg
Richard Curran

Richard Curran

BONUSES paid out to bankers in London remain a hot political topic. The Bank of England has weighed into the row – not for the first time – with a controversial new proposal to claw back the bonuses of bankers who misbehave.

The new rule would see existing bank executive contracts changed and could see bankers who take too big a risk or make fundamental errors, forced to pay back bonuses they received any time in the previous six years.

It isn't so much aimed at punishment, as making bankers think twice about taking excessive risks in the first place.

At home, the issue of bank bonuses practically disappeared, as did the bonuses themselves, in the aftermath of the crash. But banks here may be not that far away from re-instating bonuses as they return to profitability.

Yet, we have nothing like this kind of measure which might act as deterrent for recklessness, excessive risk or fundamental error.

We had the most expensive banking collapse, relative to our size, in any developed economy ever. The regulatory regime has changed a lot but it hasn't moved in the direction of hurting errant bankers in their most sensitive area – their wallets.

A raft of new corporate governance rules are there to ensure boards are made up of the right people and best placed to make the right decisions. A pretty tough fitness and probity regime now ensures that top bankers are qualified and don't have major skeletons in their cupboard.

But when bonuses return, will bank executives still be incentivised to drive possible short-term profit at the expense of long-term stability? Yes seems to be the answer.

The new Bank of England plan comes with a different context. Investment banks in London pay hundreds of millions in bonuses every year, as part of an activity in which Irish banks are not really involved.

Royal Bank of Scotland plans to go ahead paying out £576m in staff bonuses despite losing £8.2bn.

Also, Britain had the LIBOR scandal where criminal charges have now been brought against a number of traders in different banks for rigging the market.

The British banks are so bonus-obsessed that they are even getting around a new EU cap placed on bonuses by introducing a range of new paid allowances to make sure executives are not out of pocket.

The chief executive of HSBC saw his fixed pay rise by £32,000 per week from £2.5m to £4.2m after the bonus cap was introduced.

A British parliamentary committee report into the banking crash recommended that bonuses be clawed back. It also recommended that a new criminal offence be introduced. This would see bankers prosecuted if found to have engaged in "reckless misconduct in the management of a bank".

That one looks unlikely to fly because ultimately it could see people put behind bars for making a mistake.

However, the clawback clause, in some form or other, could be a runner. What would have happened if we'd had such clause in Ireland? Given the extent of the losses across the banking system (around €60bn), there surely would have been grounds to return bonuses.

Executive directors at AIB shared €9.1m in bonuses between 2004 and 2007. At Anglo Irish Bank, in the five years to 2008, €24m was paid in bonuses to executive directors. Former chief executive David Drumm received €8.4m. At Irish Nationwide, Michael Fingleton received bonuses totalling €4.5m between 2003 and 2008.

Fingleton has a €13m court judgement against him. Drumm is a bankrupt. It raises the question of whether the return of the money would have been forthcoming.

Former AIB chief executive Eugene Sheehy received €2.5m in bonuses in the three years before the bank went south. But in the summer of 2008 he spent €2.8m buying AIB shares in a gesture that signalled his belief in the stability of the bank. Those shares are practically worthless now.

The real issue in all of this is deterrent. Irish banking is now heavily regulated with new corporate governance and probity rules. Bonuses can't really be paid until the banks become profitable again. But when they do, there is nothing here similar to the British proposal around financial incentives.

The Bank of England governor Mark Carney is also proposing that executives should defer the receipt of part of their bonus for several years, to make sure things work out.

This would be very sensible in an Irish banking scenario – any idiot can lend out money in a boom and receive a bonus, the hard part is making sure somebody pays the loans back.

We shouldn't underestimate the role of the IFSC in all of this. It would be very difficult for the regulator to introduce rules that apply only to Irish banks and not to IFSC operations. The greater the restrictions placed on executives interested in coming to the IFSC, the fewer the jobs.

Perhaps more importantly, the Bank of England proposal is following up on the recommendations of a major British parliamentary inquiry into the banking system.

We haven't even started ours yet!

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