There is no set of results a bank could have declared this week which would have pleased the general public. A bank which made losses was inevitably going to be accused of continuing incompetence, while one which made profits was sure to be condemned for its greed. As John Varley, chief executive of Barclays, hinted on the Today programme on Monday, the dastardliness of public opinion should not obscure the fact that profitable banks — his made £2.99 billion in the first half of 2009 — are preferable to unprofitable ones. Anyone with savings in Barclays — not to mention anyone with any shareholdings — ought to be pleased that bankers are managing to earn their keep again. It makes a repeat of last autumn’s banking crisis less likely, with the economic collapse which would accompany it.
That said, this is no time for bankers to feel smug. And Mr Varley trod dangerously close to smugness by asserting that his bank could pay whatever bonuses it fancied because it had avoided being bailed out with taxpayers’ cash. This is not true. Barclays has taken advantage of the Bank of England’s efforts to pump liquidity into the banking system and had a £22 billion bond issue underwritten by the taxpayer. More important still, it benefited from an implicit guarantee that the government would not allow any large financial institution to go bust. Had the government not bailed out the Royal Bank of Scotland and Lloyds-HBOS, there might well have been a progressive collapse of the banking system that would have taken Barclays and Mr Varley with it.
To pretend otherwise is politically foolish when taxpayers are still footing the bill for the banking collapse. When and if the partially nationalised banks are returned to the private sector — and on the condition that taxpayers have made a profit on the venture — then bankers may be freer to pay bumper salaries and bonuses. But we are a long way from that. Northern Rock and the Lloyds Banking Group reminded us this week of why they had to be bailed out. Both made thumping losses.
Government policy towards the banking sector must not be allowed to operate on a laissez-faire basis when things go well and on an interventionist basis when things go badly. Mervyn King, governor of the Bank of England, was quite right to warn of moral hazard in the early stages of the banking crisis. Thanks to the bail-outs there is a huge risk that banks will start to behave even more recklessly than they did before the credit crunch, knowing that if the worst comes to the worst, they can expect the same treatment as Lloyds and RBS.
The government has every right to impose greater monitoring and regulation of the banking system, so why isn’t it taking more action? Aside from regularly barking at bankers, in order to deflect any blame from ministers, little has happened to prevent a repeat of the crisis. Why can’t the government regulate to say that bonuses must be paid in shares redeemable in five years’ time, not cash? Above all, why cannot 100 per cent mortgages — not to mention the 125 per cent loans which lie behind some of Northern Rock’s losses — be banned? Yet the government seems to be working in the opposite direction: trying to persuade banks to lend more freely. The government can have strong banks or it can try to reinflate the debt bubble which caused the problems in the first place. It cannot have both.
Sadly, government policy towards the banks and the economic crisis in general seems to be dictated by a political desire to generate recovery at any price in time for next year’s general election. Some bankers are showing signs of a return to recklessness, but then so, too, is one of the architects of the last boom, Gordon Brown.