No pain, no gain for banks in return to normality
The recent announcement by the European Commission on guidelines for restructuring aid to banks exposes the difficult decisions, not to mention the pain, that the whole of our banking system still has to go through to return to normality.
Competition is good, but policy to ensure it is a minefield, especially at a cross-border level.
Rules on state aid were relaxed at the height of the crisis to ensure banks across the UK and Europe could avoid the complete collapse of the banking system as we know it.
Nobody foresaw a situation in which sovereign governments had to take major banks effectively into public ownership.
But now the dust is starting to settle the question is how we return to a competitive business environment and how we introduce or reinstate relevant measures and regulation to ensure a smooth transition.
Competition Commissioner Neelie Kroes rightly points to the need to make banks viable again without state support, and to re-invigorate competition.
This will involve restructuring and maybe the disposal of some business areas.
The dilemma is that if the taxpayer wants their money back from the state-owned banks, those banks need to be able to compete on a level remuneration playing field with non-state-owned banks, so they can retain (or in some cases re-recruit) top talent to bring about the turnaround.
So on top of the European Commission announcement we have the dilemma of how to manage what is a now a very hot war for talent between our nationalised and non-state-owned banks. State-owned banks have arguably been preoccupied with lending to industry which has perhaps allowed non-state-owned banks to steal a march on them in more traditional areas of expertise. This is starting to create a brain drain from the nationalised to the non-state-owned banks but – as the recent remuneration increases at, for instance RBS, indicates – the state-owned banks are battling back.
The suggestion that there should be a European-wide framework on remuneration makes perfect sense when looking at the EU in isolation. But of course this misses the bigger picture of the global stage of financial services and simply means that some banks will move their operations outside of the EU, where they would face pay restrictions.
With such a real headache all round, there is plenty of potential for developing a lose-lose scenario involving unworkable restrictions, loss of global standing and a diminished return for tax-payers.
To avoid this we caution against hasty responses.
Best to consult widely and listen to industry. Shooting from the lip won’t help.
Stuart Fraser is chairman of Canada’s policy and resources committee