Osborne's plan to limit bank bonuses

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George Osborne's plan to limit bankers' bonuses...won't improve life for borrowers.

UK Shadow Chancellor George Osborne proposes limiting bankers' bonuses as a way of making more lending available to cash-starved businesses. He thinks that anything up to £10bn could be freed for lending if larger bonuses were paid in shares, rather than in cash. And it might focus bankers on long-term business improvement, rather than short-term deal-fixing.

I doubt it. In the first place, banks already pay their larger bonuses in shares, precisely because it keeps staff motivated and hooked into the business long term. We already have the most restrictive remuneration regulations in the world, and if people can't get paid what and how they want here, they can zip off to Switzerland, Asia or the Middle East no sweat. It's a very mobile market. Furthermore, if the banks pay in shares, who does that hit? Well, you and me, the taxpayers who are supposed to own the shares in these deadbeat high street banks. Frankly, I'd not like my shareholding watered down any further, thank you.

I'm afraid this plan looks like electioneering again. If there is one lot that people hate more than politicians, it's bankers, so they are easy targets. And yes, the bankers have paid themselves far too much, no question. But politicians should be explaining why, not just joining in the bear-baiting. They can't, of course, because they are complicit. When the Fed and the Bank of England were flooding the world with cash right up to 2007, business was never so good. Not surprisingly, everything you did succeeded, there was so much money around. So the banks paid silly bonuses in order to motivate people to do deals. When the music stopped, a lot of those deals turned out to be unsustainable, but the banks had been acting perfectly rationally, going after the money that the politicians were printing.

Another reason why bankers overpaid themselves is because there is far too little competition in banking. And the reason for that is that banks have to carry so many brain-dead bureaucrats. Regulation is a huge burden which stops new people entering the sector, and induces existing players to merge in order to spread the regulatory compliance cost. And the lack of competition is not helped by the likes of Gordon Brown forcing banks like Lloyds and HBOS to merge. We should actually be splitting banks up, not merging them – George O is right on that, at least.

People don't understand that bonuses are how up-and-down businesses (like banks) keep their wage overheads down. When things boom, you pay spectacularly. When they don't, you rein in – although with contracts in place, that might take a year or two. Frankly, with business in the state it is, I do not think that next year's bonuses will be anything like those of the past. So why not let the market do its job?

And as for all those folk starved of lending funds...well, it's not just that the banks are repairing the balance sheets. It's also that people right now are scared to borrow any more because they don't know what the future holds. Would all that bonus cash go into lending, then? As I say, I doubt it.

Dr Butler's book The Rotten State of Britain is now in paperback.