Once the celebrations are out of the way, though, it is worth reflecting for a moment. If bankers are losing their jobs, what does that say about the economic state we’re in? Or, for that matter, the state of the banking industry? And, just as important, the role of the financial services sector in the British economy? On the latest figures, bankers and other financiers contributed 10 per cent of GDP and 11 per cent, or £53 billion, of tax receipts – not to mention generating an estimated trade surplus of £36 billion in 2010.
To understand why the jobs are going now, you have to go back to 2007/8’s boom and bust and the response of politicians and regulators – not to mention the competitive reaction of the banks themselves, quick to feed off the carcase of Lehman Brothers. With the global economy burning down around them, politicians everywhere turned on the financial gushers, flooding the markets with cheap money to stimulate the economy. So they created the ideal trading conditions for any bank left standing, ironically propping up the very people who caused the crisis.
Look what happened in Britain. There was fiscal stimulus, such as the temporary VAT cut, and a total £70 billion bail-out for Royal Bank of Scotland and Lloyds Banking Group. But that was just the start of it. Hundreds of billions more went into measures that indirectly shored up the entire UK banking system – such as special liquidity and asset protection schemes. Then, with interest rates already at record lows, the Government introduced quantitative easing, conjuring up £200 billion of new money in a last-ditch attempt to get us to spend.
Similar ploys were repeated around the world. The upshot was a trader’s dream, with activity rocketing on the dry-sounding “fixed income, currencies and commodities” (FICC) desks that deal in government bonds. By 2009, banks were reporting record or near-record FICC profits. London-based banks cleaned up. They did something else, too – embarking on a hiring spree to chase such easy returns. But thanks to the popular backlash over those egregious banking bonuses, the days of old-style hiring have gone. To get round the politicians and regulators, banks deferred bonuses but compensated in part by paying much higher fixed salaries, up from say £100,000 to £300,000 for a relatively successful dealmaker. The upshot is that banks now have much less flexibility to manage their cost base.
Says one senior investment banker: “How many other industries can you think of that have gone belly up, the effect of which is to increase salaries all round? The irony is that the regulators have caused this situation. In the old days, the way you used to get rid of someone was not to pay him a bonus. Now, you can’t even leave unless someone buys you out of your deferred compensation.”
So, whereas before banks could adjust the cost base – paying millions in bonuses in the good times, nothing in the bad – they now have no option but to axe jobs. And jobs have to go for two other reasons. First, because banks hired staff expecting a pick-up in the markets and a flow of deals that hasn’t materialised – hit by such things as the Japanese tsunami, the eurozone crisis and America’s tortuous debt talks. Goldman Sachs’ FICC trading revenues fell 64 per cent year-on-year in the second quarter of 2011.
Second, because regulation is changing the nature of banking, forcing firms to hold much more capital on their balance sheets in case all hell breaks loose again. The effect of this is to have made some previous activities – such as proprietary trading, where traders effectively use the banks’ own money to make bets – too risky. Other operations now have profit margins too slim to be worth the bother.
The upshot is that banks will probably need fewer staff, at least until there is a sustained market rally. But the reshaping of the industry – even while we wait in Britain for the Independent Commission on Banking to rule on that thorny question of retail versus “casino” banking – raises a further issue. Crucial though the City of London may be, there is a legitimate debate to be had over how big the banking sector should be in relation to the rest of the economy.
Despite the popular misconception, financial services actually account for a smaller proportion of GDP than manufacturing, which chips in close to 13 per cent. But there is acknowledgement in the City that, in the wake of the credit crisis, the Government is right to seek a more balanced economy.
Simon Bragg, the chief executive of stockbroker Oriel Securities, says: “Financial services both here and in the US became too powerful. You feel sorry for the individual bankers losing their jobs, who’ve got mortgages and school fees to pay. But it is part of the process of the economy rebalancing itself. The UK proportion of financial services will reduce, and it has to reduce.”
He adds that one consequence of the restructuring of the banking industry is that “it will encourage people to do other things. There are people working in banks who hate their work and only do it for the money. Some of them will take their redundancy cheque and start their own business.”
Back in 2009, Lord Turner, the former Financial Services Authority chairman, controversially deemed some banking activities “socially useless”. He also claimed the City had grown “beyond a reasonable size”, accounting for too great a share of Britain’s output and attracting too many of our brightest graduates. “If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit,” he said at the time.
Lord Turner caused a brouhaha, with what sounded a rather prescriptive riposte to the banking crisis. But, faced with new rules on bonuses and capital, banks are making their own hard choices. The upshot may be a more sober, less colourful industry – but hopefully a more resilient one, too. Mr Cable may yet have to find a new subject for his jokes.
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