Updated: Wednesday, 11th February, 2009 12:00pm

Comments () | Print | Email |

Banks need to get real on executive pay

With the final decision on recapitalisation of the banks expected to be made within the next day or so, much public attention has focused in the past week on the bonus culture evident within the country"s top banks.

Those in charge of this country"s two major banks, AIB and Bank of Ireland, between them earned a salary of €5 million in 2007-2008 at a time when the institutions over which they presided lurched towards financial calamity. Bonuses made up a substantial proportion of this figure. But such perks have always been part of the corporate culture in financial services. In the boom years, profits rose and bonuses got bigger, creating an incentive for those in the top echelons of the banks to keep making ever greater profits and taking on more risky lending than might have been advisable as the economic tide began to turn.

The angry disbelief of the citizenry of this country caused by recent revelations is fully understandable and justified and has been fuelled by the disclosure that some banks planned up until very recently to continue to pay generous bonuses to senior managers, citing contractual obligations.

Apopleptic public anger over this matter will ultimately force any bank quoting this mantra into a reality check. It is bordering on the obscene that millions of euro could be paid in bonuses to bank executives while the entire financial system is in meltdown and people are in danger of losing the roof above their heads if they default on their mortgage.

Executive pay for bankers must be substantially curtailed to assuage public anger, particularly in light of the fact that billions of euro of taxpayers" money is about to be given to the banks, which have been largely responsible for the mess in which this country"s financial system now finds itself. At a time when public money on this scale is being pumped into the country"s biggest banks to keep them afloat, it is not on that the fat cats which have presided over such virtual ruination of the finance system could even consider accepting a bonus. Against the bleak backdrop of an economy staring into the abyss, any bank receiving money from the State should be trimming executive remuneration in that bank by a minimum of 25 per cent but probably up to 50 per cent.

There has to be a realisation that we are now living in a world in which the global landscape has changed dramatically, one in which the world"s financial system has all but collapsed and one in which the Government has had to underwrite banking deposits in this country. New US President Barack Obama has capped Wall Street bankers" pay at $500,000. We should do the same here, but set the cap at a lower level.

The recapitalisation figure of €7 billion for Bank of Ireland and AIB now may not be enough, economists warned this week, with estimates of what is needed to get the banks lending once more reckoned to be closer to €20bn, a truly frightening figure. The time has now come to set up a 'toxic bank" to absorb all the bad debts of Ireland"s main lending institutions and allow them to trade their way back to health.

The template for this has already been set in Sweden where so-called 'bad banks" were part of its rescue package in the 1990s. The Stockholm government set up two 'bad banks" to manage the 'toxic assets" of two nationalised institutions and the plan was very effective.

They restructured and sold the distressed loans and Sweden managed to keep the cost of the restructuring to below two per cent of the country"s GDP.

Taking the bad loans off a bank"s balance sheet leaves behind a 'clean" bank and one that will find it easier to raise capital or attract new investors, precisely what needs to happen with Ireland"s banks. What we are faced with in Ireland today is probably on a larger scale and possibly more complex than what happened in Scandinavia, but it is an option that the Government must consider seriously at this stage.