It is difficult to know where to start in writing a blog post about George Osborne’s proposals to ban high-street bank bonuses in cash of more than £2,000. Let me, instead, raise a number of questions.
1. It will be possible for banks to continue paying bonuses in shares. As such, will bank employees be allowed to borrow cash (from high street banks) using the shares (or anything else) for security? If so, any reasonably well paid banker would simply regard the shares as fungible.
2. Will the employee be able to sell the shares? If so, then the whole object of the plan is defeated.
3. This will only apply to high street banks and not investment banks – how do we distinguish between the two, especially as highly paid employees within (say) RBS will be working for a banking group and their work will cut across several subsidiaries?
Osborne could do with attending an elementary corporate finance course. If (say) HSBC pays out £1m in bonuses, then this comes out of profits that would have been otherwise distributed to shareholders or retained within the business (and, of course, we expect it comes out of additional profits generated by the employees who are being rewarded). It would be ridiculous for a bank to forego profitable lending opportunities to pay such bonuses so we can expect no change in lending habits by banks. If the bank creates more shares to give to its employees instead then there will be more cash to pay to shareholders as dividends and these increased dividends will compensate shareholders for the fall in the value of their diluted equity.
No doubt George Osborne has thought of all this. No doubt too, he is in the process of having a huge rulebook drafted with anti-avoidance measures. Bankers will then come up with anti-anti-avoidance measures and a rulebook will be drafted of anti-anti-anti-avoidance measures for each of the anti-anti-avoidance measures. Soon the area of City bonuses will look like every other area of financial regulation, nobody will be able to see the wood for the trees and lawyers will have a field day. Just as we called the post-war period “Butskellism” perhaps we will be calling the period from 1997 to 2017 the “Brownborne period”.