Bonus bashing won't prevent a crisis

WITH the end of the reporting season for the major UK banks yesterday, it is time for the fuss over banking bonuses to laid to rest.

WITH the end of the reporting season for the major UK banks yesterday, it is time for the fuss over banking bonuses to laid to rest.

Partly, this is because it is getting tedious, although HSBC chief executive Michael Geoghegan at least provided a note of variety yesterday by giving his bonus to charity rather than turning it down flat.

Partly, also, it is because, despite the need for some reform, so much of the criticism is ill-founded.

The bonus fund within the investment banking division of Royal Bank of Scotland is an easy target, given the state's majority stake in the group following its bail-out, but it is a fact that, but for a good performance by the division, RBS's loss for 2009 would have been far wider than that �3.6billion reported last week.

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It might be argued that were the group to offer better remuneration, rather than the minimum it “can get away with”, as chief executive Stephen Hester recently put it, its investment banking division might perform even better on behalf of shareholders, including the taxpayer.

The main reason that the bonus issue needs to be set aside, however, is that it is obscuring the bigger picture.

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While the RBS pay-outs were attracting more headlines last Thursday, a far more signicant development was taking place which received little media coverage outside of the specialist financial sections.

Bank of England governor Mervyn King was giving his views to the Future of Banking Commission, a cross-party panel set up to assess the need for long-term reform of the banking system.

Mr King warned, correctly, that only radical restructuring will be sufficient to protect depositors and, ultimately, taxpayers in the event of a future crisis.

The present structure involved an “inherent riskiness”, he said, and it was a “false paradise” to regard deposits as “safe” when the banks holding them were investing themselves in ”risky assets”

He urged the commission to push for the creation of “narrow banks” in which retail deposits would be “ring-fenced and protected” from investment banking activities ? activities which could then be allowed to fail, if necessary, without dragging down the high street banking system with them.

It is in this kind of reform that the solution to preventing a repetition of the recent crisis lies, not in slashing bonuses or treating recipients as social pariahs.

Unlike Mr King, the Government is not convinced, although it may well be a different government which the commission has to convince when it reports after the General Election

Then again, Shadow Chancellor George Osborne was himself among those who jumped on the bonus-bashing bandwagon last week ? which is a worry.

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