Bank bonuses and bogus arguments

Here I go again, defending bankers. It's a dirty job, but someone has to do it. Well, it's more than a hobby than a job because the banks don't even pay me to do it.

It's bonus time once more, that time of year when the unpleasant politics of envy erupts after the peace and goodwill of the holiday season. This time, RBS wants to pay bonuses more than 200% of staff salaries. That of course requires the permission of its shareholders – principally, the UK Government in the form of Chancellor George Osborne. Such bonuses are "inappropriate" say many political critics, particularly when "ordinary families are struggling with the cost of living."

But bonuses are a very sensible way to pay people in a volatile sector. In an economy that is growing, as the UK's is now, banking business is great. There are company mergers and acquisitions to do, investments to be placed, and all the rest. In a stuttering economy, business is disastrous. So banks have a system that rewards key people on the basis of results. That is a lot better than scrapping bonuses, raising salaries instead (which is what would happen), and then having to lay people off (and lose their expertise) where you hit a rough patch. With a bonus system, you just pay them less and they hang on, in the hope and expectation that things will improve.

It should not be up to MPs – and MEPs in Brussels, Strasbourg, or wherever they have decanted to this week – to decide how much bankers should be paid. They are hardly icons of virtue on the pay and expenses front themselves. Most of them don't even understand the sector. If bonus caps are to "reduce risk taking", then why did MEPs cap fund managers, who don't take anything like the risks that bankers do.

Bank bonuses are already heavily restricted. Rules introduced in 2010 cut the amount that could be paid in cash, and spread the pay-out time over 3-5 years. So people today get more of their bonus in shares - which means that the long-term health of their company is dearer to their hearts than any one-off "quick profit."

Let us not forget that after New York, London is the world's leading services centre. The sector brings in about £60bn in tax every year, more than 10% of the government's entire budget. We need it to succeed, and retain talent – which means paying them world market rates. That's what we do with footballers – John Terry is paid £6.7m a year, Wayne Rooney is on £15.1m and Steven Gerrard picks up £7.2m and got an MBE too. But football clubs are very small businesses compared to banks. Though a world footballing brand, Manchester United's capitalization is just £2.47bn; the market capitalization of RBS is seventeen times bigger, at £41.8bn. Should we be surprised if star performers in RBS are paid seventeen times what Rooney earns? But in fact we baulk when they are paid fifteen times less.

There is a problem with banking, but it is not bonuses. It is the lack of competition. The main UK banks can literally be counted on one hand: HSBC, Lloyds (which includes Bank of Scotland), RBS (which inlcudes NatWest), Barclays and Standard Chartered - though the latter operates mainly overseas. Lack of competition means customers get a worse service at a higher price, and providers can indeed overpay themselves. In a competitive market, anyone over-rewarding their staff would go out of business. So let's not try to guess what the "right" remuneration is for bankers. Let's open the sector to competition – which means scaling back the regulation on new entrants – and let the market do the job for us.