May 27, 2016

Low capital requirements for banks lead, automatically, naturally, to high bonuses for bankers

Sir, Diane Coyle writes: “If the chief executive of a company seriously tells me, as a shareholder, that he will not put in as much effort as he otherwise would unless I link his pay to a handful of metrics, I have every reason to be doubtful about hiring him to do the job” “Burger flippers deserve bonuses, bankers do not” May 26.

That is absolutely right; as long as the shareholder was putting in enough efforts himself… otherwise he might better shut up in silent complicity.

If you make the argument that the bankers are helping to convince the regulators that the shareholders of a bank need to put in very little equity, and therefore the shareholders are made more irrelevant, then it is much easier to understand why bankers have been able to get away with what they are doing.

Bank equity, allowed to be highly leveraged, especially on what is perceived as safe, has produced great returns, which have kept bank shareholders happy and in a complacent mood.

Ask the banks to triple their capital, or at least put up 10 percent of equity against absolutely all assets, and then you might begin see some bonus restricting relations developing between bank managers and the shareholders of banks.

@PerKurowski ©