Basel & Bank Balances

The new Basel rules on bank capital had been introduced to impose a minimum cushion of capital a bank must keep to absorb losses on their loans.

As Robert Peston said on the BBC website, this represents “the most important global initiative to learn the lessons of the 2008 banking crisis”.

One of the key ratios involved in these new rules is what’s known as the “core capital” ratio.  Under the new rules, this will rise from 2% to 7% creating a much more stringent environment for lending.

It is against this backdrop that it has just been reported that banks are due to pay bonuses of over £7bn this year which whilst lower than previous years, is still a staggering amount in the current climate.  Whilst what the government take from this amount is considerable and will help the public purse, one has to wonder whether it would have been better for everyone, particularly those small businesses struggling to obtain finance, to use a large chunk of this proposed bonus to shore up and add to the banks capital basis.  As the amount the banks can lend is so closely linked to this new capital ratio, it seems incomprehensible that banks should be so extravagant with their bonuses once again at a time when British businesses are so desperate for funding.

At a time when tens of thousands of workers around the country are facing the prospect of unemployment and with the spending review about to be revealed in full, these latest revelations are without doubt a “red rag to a bull”.  What if anything the government could have done to force the banks to moderate their bonuses is questionable despite the fact that they are the majority owner of some of these very institutions.

Nevertheless, there will be many in the country who will be horrified by these latest announcements on bank bonuses and it is hard to find any positive reasons to support them.