Banks, Bonuses and Taxing Profits !
Monday, June 28, 2010 @ 7:51 PM
The media has recently had a field day condemning the Banks for paying large bonuses to its staff and I can fully understand this condemnation - particularly in respect those Banks at the heart of the financial crisis and who were rescued by the authorities.
As one who relied on the Banking industry to provide my creature comforts for a number of years I think that someone needs to offer some justification for the Banks actions. Large bonuses, far in excess of those under discussion, are frequently paid to professional footballers and I read recently that a T.V. personality moved to another channel for £6million over four years which did not incur any special media attention !
So it seems that bonuses are acceptable for other professions but not for the Banking industry !
It also has to be remembered that by restricting the magnitude of bonuses paid to key Banking staff it will inevitably result in the loss of this talent to other industries and a subsequent reduction in Banking profitability as a whole. This would certainly be a bad thing at the present time. I think that the media have rather missed the point and have not really looked at the reasons why some Banks required assistance in the first instance.
To put the record straight, the main reason for the financial crisis was the authorities failure to properly regulate the Banks activities and insure capital adequacy. In the U.K. this role was undertaken successfully for many years by the Bank of England however this activity was relinquished and given to the financial services authority which begs the question whether this newly formed institution had the necessary expertise to fully regulate the Banking sector ? It has subsequently been proved that clearly they did not, and I wonder if they really had any idea what the Banks were doing and the inherent risks of their activities ?
If the authorities had regulated the Banks properly in the first place it is unlikely that any “bail outs” would have been necessary - the Banks were, after all, operating within the rules as they interpreted them.
The International Monetary Fund (IMF) has now produced a report recommending two new worldwide taxes on Banks . One of these would be a financial stability contribution to pay for the cost of future government bailouts for the system (do they know something we don’t?) and the other is a “financial activities tax” which would be levied on the sum of the profits and remuneration of financial institutions and paid to government’s general revenue. This strikes me as bolting the stable door after the horse has escaped and could also be viewed as a simple revenue raising activity !
This report also claims that the banking system has caused such acute damage to the world economy that firms will have to make a far more substantial contribution to public finances in the future.
Surely the simple answer is careful regulation, but not unnecessarily restrictive, and allow those Banks who are successful to reward their employees accordingly ?