Tuesday, November 30, 2010

Bonuses: disclosure is not the only weapon

What happened: Chancellor George Osborne decided not to implement UK bonus disclosure rules proposed by Sir David Walker. The rules would have forced banks to disclose in anonymous bands how many employees earned more than £1 in a year.

What it means: 2010 bonuses for UK banks will be paid without the new disclosure rules. Shareholders will not be able to challenge boards on staff pay. Public outrage, already heightened by austerity measures, will be less than it might have been, but meaningful reductions in bank pay and reform of risk-inducing compensation practices will be delayed.

What happens next: Osborne will write to European finance ministers to seek European agreement on bonus disclosure. He will find a willing audience on the Continent, especially France, but less likely in the US. The result may be European disclosure rules next year or later, watered down by the UK to compete with Wall Street. In the meantime, banks are raising basic salaries to compensate for lower bonuses.

Comment: Few people now doubt that high financial sector pay was central to the financial crisis; it feeds asymmetric risks, encourages economic rent-gouging and has contributed to the under-capitalisation of lending banks. Sir David Walker's disclosure rules were supposed to help shareholders control financial pay but now Osborne has back-tracked it is worth asking - would they have been enough, and what other options are there?

Monday, November 15, 2010

Basel 3 may hold the key to monetary reform

If radical monetary reform is too much too soon, perhaps a little-discussed part of Basel 3 holds the answer.

Monetary reform is rapidly gaining the public’s interest, something the Basel rules on bank capital adequacy have never quite managed. But perhaps Basel has a special role to play in helping monetary reform come of age.

Calls for monetary reform are being led by a small band of unorthodox economists whose ideas are catching on in these austerity days.

At its heart is the realisation that today's money is in fact credit, or debt, and it is mostly created by private banks when they add digits to people’s bank accounts.

As a plethora of online presentations explain (type “how banks create money” into google), it’s illegal to print bank notes but not to create digital credits – the online equivalent - as long as you’re a bank and you follow the rules.

This is how fractional reserve banking works in a digital age but the realisation has potentially big implications for politicians fighting deficits and stagflation.