David Cameron’s government has switched its focus in talks with U.K. banks to boosting business lending from cutting pay, officials familiar with the situation said, marking a retreat from public statements last year.
The two government officials, who declined to be identified because the talks are private, said yesterday ministers recognized that, however much banks cut bonuses, voters are still likely to view bankers’ pay as too high. They said increases in lending might lead to faster economic growth, boosting the government’s popularity.
“We like to lend, it’s what we do,” Barclays Plc Chief Executive Officer Bob Diamond told lawmakers on Parliament’s Treasury Committee today in London. “There’s a lot of debate in the area of bonuses, there is a lot of sensitivity. Bonuses are not taken lightly.”
Cameron’s coalition faces the same problem as the previous Labour administration after its 2008 rescue of the banks. The government needs lenders it has taken stakes in -- such as Royal Bank of Scotland Group Plc -- to succeed, which means paying competitive salaries, while it can’t control the compensation paid by other banks -- such as Barclays. Diamond said neither Cameron nor Chancellor of the Exchequer George Osborne had ever personally asked him to show restraint on his own bonus.
“Cameron has realized that in order for the taxpayer to recoup its investment you can’t choke the banks,” said Jason Kennedy, CEO of Kennedy Group, a London-based executive-search firm. “It doesn’t make sense to kill the golden goose.”
The officials said the government is looking at whether forcing more disclosure of pay could encourage shareholders to call for restraint. Osborne is trying to persuade European Union countries to join the U.K. in such a move.
Morgan Stanley senior adviser David Walker said in a 2009 report commissioned by the Labour government that banks should disclose the number of individuals who earn more than 1 million pounds. Osborne opted to seek international agreement.
Britain’s bankers learn the size of their bonuses this month, and they’re generally paid in late February. The payments may total as much as 7 billion pounds ($11 billion), according to the Centre for Economics & Business Research Ltd.
The headlines on bonuses will come as taxpayers, who two years ago provided about 1 trillion pounds in bailouts and guarantees to shore up the financial system, begin what Cameron warned Jan. 9 will be a “difficult” year, with tax rises and public-sector pay freezes and job cuts.
Bob Crow, general secretary of the Rail, Maritime and Transport union, said the retreat showed the Conservative-led government’s priorities.
“So much for sharing the pain,” he said in an e-mailed statement. “My advice to any worker told they should take a pay freeze or a pay cut this year is to point to the bankers, stand firm and demand a fair deal. That is exactly what RMT will be doing.”
Diamond got a 21.1 million-pound pay package in 2007 and then pocketed 26.8 million pounds from the $15.2 billion sale of Barclays Global Investors in 2009.
Even though he shunned a bonus for 2008 and 2009, Diamond has remained a focus of banker-bashing. Just weeks before the May 6 U.K. general election, then Business Secretary Peter Mandelson called Diamond the “unacceptable face of banking.”
Cameron said in a Jan. 9 BBC interview that he wanted this year’s bonus pool to be less than last year’s, estimated at 7.3 billion pounds by CEBR. He also said Edinburgh-based RBS “should not be leading the way on bonuses -- they should be a back marker.”
‘Successful Market Economy’
Cameron went on to offer banks a “settlement where we recognize that a successful banking sector is part of a successful market economy.”
“Do we still need the banks to do more to demonstrate their social responsibility? Yes, we do,” Cameron said. “We want these banks to be lending to businesses large and small.”
Ministers have scaled back their rhetoric since the start of the year. In September, Business Secretary Vince Cable warned of a “train crash” if bonuses were too high. Deputy Prime Minister Nick Clegg said in December the government wouldn’t “stand idly by” on pay. He restricted his comments on the subject yesterday to state-owned banks, telling BBC Radio 4 they should be “sensitive to what British taxpayers want.”
On the issue of pay at other banks, Clegg pointed to new Financial Services Authority rules agreed on by EU regulators restricting guaranteed bonuses and up-front cash payments for banks’ proprietary traders and broker dealers. The rules allow bankers to receive about 25 percent of their bonuses in immediate cash payouts and require the rest to be deferred or held in shares for a minimum of three years.
Since the credit crunch began in 2007, banks have been under pressure from business lobby groups and politicians to expand lending. Britain’s six largest banks said in October they will start a 1.5 billion-pound fund to help smaller companies get financing.
Banks said that the availability of credit to companies was “broadly unchanged” in the fourth quarter and expect it to remain at a similar level in the first three months of this year, according to a Bank of England survey.
A pledge by British banks to boost business lending may be monitored by the Bank of England, the Financial Times reported today.
A net 3.2 percent of respondents to the credit conditions survey said availability increased in the three months through December, down from 7.8 percent in the third quarter, the report showed. That’s the smallest increase since 2008.