Translated material
Banks and bonuses
Strengthening control over credit institutions should not turn into a populist campaign
The global financial crisis is ending, or at least moving from an acute phase to a chronic one. As you know, in such cases, the innocent are usually punished and the innocent are rewarded. We will see how this happens locally, in our native Palestines. The global campaign to restore order was led by US President Barack Obama. Leaving aside his rhetoric, which is probably electorally effective, let's look at specific proposals. There are two main ones: to limit the bonuses paid to bankers, for which purpose subject them to additional taxation, and to limit the scale of activity and influence of the so-called Too big to fail - banks (or officially systemically important financial institutions - systemically important financial institutions -- SFI).The possibility of a fiscal burden is also being considered - additional taxation of the increase in leverage (liabilities) of those banks whose assets exceed $50 billion. In addition, it is proposed to structurally limit their activities: again separate commercial and investment banking (Glass-Steagall Act), prohibit trading transactions on your balance, etc.
Let us not now operate in terms of “who are the judges”, turning to the fundamental prerequisites of the global financial crisis - double deficits (budget and trade balance), artificial stimulation of consumption and curbing savings through maintaining excessively low interest rates in the United States. Let's look at the measures ourselves.
Is there a problem with bonuses? Eat. What does it consist of? Only partially in their size. And the (non-populist) logic here is like this. Ensuring financial stability and reducing risks in the global financial system require conserving the capital of banks and reducing the amount of their distributed profits. Since it is retained earnings, together with ordinary shares, that constitute the basis of the first-tier capital (in the true sense, this is the first-tier capital) of banks, which can only compensate for the shortage of reserves for possible losses and write-offs. But in this sense, bonuses as part of the profit distributed in favor of the bank’s management are no different from dividends as part of the profit distributed in favor of the bank’s owners. Cutting bonuses to increase dividends would be counterproductive. Simply put, the bonuses of German Gref and Andrei Kostin should be limited only in conjunction with restrictions on dividends of the owner of VTB and Sberbank, that is, first of all, the state.
How exactly to limit? Just not through taxation. The global community of regulators, united within the framework of the Financial Stability Board, has already given, is giving and is preparing to give many recommendations, but none of them are of a fiscal nature. The tax system, in principle, should be neutral and universal with respect to different categories of taxpayers. But prudential norms may well be targeted. Therefore, the Financial Stability Board and the Basel Committee on Banking Supervision are considering the possibility of introducing capital conservation standards and establishing, in addition to the minimum capital adequacy requirement, an additional reserve range. If the bank's capital level is in this range, restrictions are imposed on the distribution of profits (whether for the payment of bonuses, dividends or, say, charity), which will be more stringent the closer to the lower limit of the range the capital adequacy level is.
But the main thing in regulating bonuses is not the size, but the structure. Bonuses should be structured in such a way as to discourage excessive risk taking. To do this, it is recommended to increase the base for their accrual (not a year, but three to five years), pay not in a lump sum, but in installments, with the possibility of adjustment in subsequent periods, and not in cash, but in bank shares. And everything else in the anti-bonus campaign is from the evil one, i.e. preparations for the next presidential elections.
Is there an SFI problem in this case? Of course it exists. And very spicy. But the point is not only in their size, but, so to speak, in their greater clarity for the authorities. And any enterprises from the various lists of systemically important ones, which we keep afloat at all costs, are carriers of systemic risks. But, firstly, here too the fiscal approach is not recommended by the international community of regulators. Instead, the issue of introducing a new leverage standard is being discussed, which would regulate the amount of liabilities assumed by the bank (both on-balance sheet and off-balance sheet). Secondly, the Financial Stability Board is trying to approach this problem as comprehensively and carefully as possible. Yes, measures to disincentivize the growth of the size of financial institutions, reduce their complexity, and prohibit them from providing certain types of financial services are being considered, but only as one of the possible elements in a whole system of measures that involves the introduction of special supervisory requirements (including capital adequacy standards, liquidity, leverage, reserves), approval of best micro- and macro-supervisory practices (for example, the creation of international supervisory boards, additional supervisory circuits, etc.), development of special plans and institutions for anti-crisis actions for financial institutions, strengthening of basic financial infrastructure, etc.
At the same time, the Financial Stability Board plans to further analyze the possible consequences of the measures under consideration during 2010, weigh the pros and cons both in terms of stability and development, and then recommend their implementation. Acting with the grace of a bull in a china shop is inappropriate here.