Bank bonuses ‘to run to billions in 2011’

The government is resigned to UK banks paying out billions of pounds in bonuses this year, despite its calls to curb the payments, the BBC has learned.

The best the coalition can hope for is a declaration from the banks that they will pay out less than they would have without government intervention, said BBC business editor Robert Peston.

The government is also looking for banks to lend more to small businesses.

Business Secretary Vince Cable has been vocal in his opposition to big bonuses.

He told the BBC last month that the coalition government was “fully signed up” to “robust action” in curbing bonuses.

Bonus rules
There are also questions about any declaration by the banks that they will make at least some concessions.

One senior banker told our correspondent there “could be more spin than substance” in any commitments the banks make to reduce bonuses.

Royal Bank of Scotland may pay nearer £1bn in bonuses than last year’s £1.3bn, while Barclays may pay less that the £5bn-£6bn in total remuneration that its results from the first nine months of last year suggest are due to its investment bankers, our correspondent said.

Investment banking has been a less profitable business for many banks in 2010 than it was in 2009. So bonuses were expected to decline in any case.”

But even if bonuses are cut, salaries have risen significantly to compensate, by up to 40% in some cases, he added.

Banks have already begun re-balancing pay packages following new Europe-wide rules on bonuses agreed last summer and confirmed last month.

These include introducing independent remuneration committees and setting maximum levels of bonus payments as a percentage of basic salary.

They also include deferring between 40% and 60% of bonuses for between three and five years, paying half of them in shares rather than cash and excluding any rewards for failure.

These particular rules are designed to curb the kind of short-term risk- taking by bankers that some observers argue contributed to the financial crisis.

In the UK, some of these rules will only apply to the big banks – smaller firms, including some banks as well as hedge funds and asset managers, will be exempt.

UK banks have long resisted the further reductions in bonus payments that the government has called for.

The government has pumped billions of pounds into the banking sector, and has bailed out both Royal Bank of Scotland and Lloyds Banking Group.

As a result, many have argued that it should have a greater say in how much banks pay out in bonuses.

However, the banks argue that they cannot dramatically reduce bonuses without the risk of losing top staff to banks based overseas, which are under less pressure to cut the payments.

Increased lending
As a concession, however, the government wants the banks to commit to lending more to small businesses, which is seen as key to boosting the economic recovery.

The banks have been criticised for not lending more to help businesses throughout the downturn.

For their part, the banks argue that the demand for lending has dropped off as businesses look to consolidate rather than invest.

They also say they are under pressure from the government to hold more cash in reserve to protect themselves better against any future financial crises.

via BBC News.

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