George Osborne on Monday called for retail banks to use bonus cash to boost lending in the real economy. Unlike Boris’s attack on bonuses last week, which was based on justice, Osborne is pitching it as a practical way to get lending going again.
The idea sounds good in principle. George Soros wrote in Monday’s FT that banks must first earn their way out of trouble, and then start lending. He says governments should mirror this two-stage process with their monetary policy, keeping it loose while banks rebuild profits, and tightening it as credit returns.
Osborn’s idea works in a similar way, forcing banks to retain bonus cash until the second phase of the recovery, when they are profitable enough to lend easily again.
It’s a practical suggestion but far from perfect. The scheme would only catch investment bankers working at firms with a retail arm, such as Barclays, RBS and HSBC. Those elsewhere will get off scott-free, tilting the field even more in favour of Goldman Sachs and others.
A more technical problem is that simply parking this year’s bonus cash on bank balance sheets will not increase lending, as the Bank of England’s QE programme has already shown. Lending banks are hoarding cash from all sources to rebuild their capital.
Regulators are working on increased capital and liquidity requirements for banks across the board but have yet to decide the exact levels. Until this uncertainty is lifted, lending will continue to be weak even with Osborne’s bonus restrictions.
If the shadow chancellor really wants this year’s bonuses to help lending in the real economy, he should call for a tax on all investment bank bonuses and use the proceeds to underwrite the “big, bold national loan guarantee scheme” that he says a Conservative government would have introduced to restore lending.
I'm not holding my breath.