More than 15 years have passed since the global financial crisis, when Lehman Brothers, Bear Stearns and the Royal Bank of Scotland (among others) went bankrupt. At the time, the big banks deserved the tidal wave of opprobrium that fell upon them. They duly agreed to huge increases in capital requirements, dividend bans and other controls on distributions and remuneration. Just a few years ago, those who dared to raise their heads to say that enough was enough still heard bullets whizzing past their ears.
Today, has the state of mind finally changed? Has the banks’ political reputation been rehabilitated now that the ravages of the financial crisis are in the past, and after a pandemic where they were part of the solution, rather than being the cause of the problem? The answers to these questions depend a lot on geography.
For example, if you’re in the United States, three notable bank failures in 2023 – Silicon Valley Bank, First Republic and Signature Bank – might lead you to think that banks are pariahs. However, this has not stopped US banks from adopting an aggressive stance towards the US Federal Reserve’s proposals for rigorous implementation of the final part of the Basel 3 capital reforms.
Regulators have taken to calling these reforms “Basel 3.1,” suggesting that it is simply a tidying up exercise to tie up a few details. For their part, American banks prefer to speak of the “Basel Endgame”, which has quite different connotations. I can’t say whether the reference to Samuel Beckett’s apocalyptic play is deliberate, but it certainly raises the stakes considerably. The Bank Policy Institute – a banking industry trade group – has run ads warning that the proposals would saddle families and small businesses with higher borrowing costs or even loss of access to credit.
It is too early to say whether the Fed will be affected by this campaign. But it is difficult to imagine such a thing in Europe. I very much doubt that European banks have the confidence to make their arguments about capital requirements – which they actually face – in the court of public opinion, where the jury remains largely against them.
With the rise in interest rates, bank profitability increased after several lean years. In an effort to secure useful revenue from tax hikes that might even be popular, many European countries have implemented special tax regimes targeting the banking sector. Spain has introduced a tax on bank revenues, not just profits, and Slovakia recently announced a similar measure. The new Italian tax regime is Byzantinely complex, but it will generate additional revenue. Finally, Belgium launched a government bond issue targeting households, explicitly designed to remove deposits from the banking sector where, according to the government, they were not being properly remunerated. The result was a sort of government-sponsored bank panic.
It is not surprising that governments on the left, as in Spain, and on the right, as in Italy, have reached similar conclusions about banks. Socialist voters have never liked bankers, and the European far right – which is growing almost everywhere – has always flirted with the rhetoric of banker conspiracies, usually including a Rothschild or two lurking in the shadows.
As usual, the UK sits between the US and Europe. Although he has not introduced new targeted tax increases, he already has a special bank levy dating back more than a decade. Political pressure has recently focused on perceptions that banks have been slow to pass on interest rate increases to depositors. As a result, the Bank of England’s (BOE) plans for Basel 3.1 are somewhat stricter than those envisaged across the Channel.
However, the government has taken a measure that will certainly make (some) bankers happy: it has removed the restriction on bonuses. In 2014, the European Banking Authority capped banker bonuses at 100% of base salary, or 200% with explicit shareholder approval. The BOE opposed the policy at the time, arguing that increasing the fixed portion of compensation for investment bankers and traders would make their institutions more vulnerable in an economic downturn.
By removing the cap, the UK will make London-based US banks more attractive to recruits than their European counterparts (Barclays will be the only UK bank particularly affected, as it is the only one that still has an investment banking business quite important). One would therefore have expected EU banks to argue in favor of removing the cap across the continent. But so far, they have been silent. Hostility towards bankers remains strong within the European Union, and elections to the European Parliament will take place in June. An American-style advertising campaign demanding seven-figure bonuses for struggling derivatives traders may not elicit the desired response.
It therefore seems that European banks will remain unloved and unfree, while American banks will continue to gain market share in Europe, with the price of their shares (relative to book value) increasing significantly more than that of European banks. EU or UK. This situation is hardly ideal. Europe needs a competitive banking system as its economy struggles to regain momentum after COVID-19 and Russia’s invasion of Ukraine. Its regulatory and fiscal environment should be determined by rational analysis, not by the memory of past sins. Mario Draghi, charged by the European Commission with exploring ways to strengthen the continent’s competitiveness, should keep this point in mind.
This article is originally published on allnews.ch