Giving banks a spank a popular pastime

BY NICK SMITH

OPINION: When British balladeer Billy Bragg first visited New Zealand in 1986 he was kicking against those driving British prime minister Margaret Thatcher's revolution and bemoaning the plight of the working class.

Bragg really was ''looking for a  new England'', despite what he sings in his 1983 hit. ''The Bard from Barking'', whom I accompanied on that two-week tour, even had some private warning words for New Zealand, which was fast following Britain's deregulated path.

The 1984 Labour Government risked betraying its core constituency, was his early verdict. Twenty-five years later, Bragg's New England is three New Labour terms old and music's most literate political songwriter has a new protest cause: he doesn't want to pay his taxes.

It is not my intention to paint him  as a hypocrite. His is a personal stand against what the composer sees as state inaction over an ''excessive bonus culture'' in the banking sector.

''The government has the right to limit the size of Royal Bank of Scotland bonuses and until it exercises it, Alistair Darling's not having my money,'' is how he put it in a newspaper column. As a taxpayershareholder, Bragg wants a say on pay.

It is certainly easier for the government to impose restrictions on government pay than institutional shareholders. A shareholder vote on executive remuneration is not unknown in Britain and Europe, particularly these days, but seems to have little effect. In the United States, firms getting government assistance are compelled to give shareholders a vote, albeit non-binding.

Many people would rather give the banks the bash, a popular pastime and, sometimes, not undeserved. As Clive Crook drolly notes in the Financial Times: ''Whenever you wonder if rage at Wall Street is getting a little out of hand, some titan of the industry speaks up and makes you think, 'Let's go down there and smash some windows'.'' He was talking about worthies from Goldman Sachs and JPMorgan Chase refusing any blame for the global financial crisis and arguing they should not be punished by, for instance, President Barack Obama's ''financial crisis responsibility fee'', expected to generate about US$90 billion (NZ$128b) in government revenue over 10 years. Crook surprisingly  argues Bragg's corner, saying regulation, including restrictions on bonuses, is a smarter way of punishment and reform of the financial sector. Among other measures, he advocates higher and cyclically adjusted capital ratios.

New Zealand banks do not have anything approaching the nauseating bonus culture of overseas financial sectors but, nevertheless, bankbashing is proving just as popular Down Under as Up Over. Last year's protracted tax disputes with Inland Revenue were seen by many as evidence of the perfidy of the Australian-owned entities - ones prepared to bilk the taxpayer in order to enrich their trans-Tasman masters.

Is a more-than-$2.2 settlement enough to assuage public desire for vengeance? Probably not. The Reserve Bank has also, despite its well-behaved banking sector, managed to achieve a delicate balance in bash and regulation in its response to the crisis to date.

As James Mitchell, ASB's chief of relationship banking, notes, the Reserve Bank has increased the amount of regulatory capital banks must hold against housing assets.

''If the regulator says you have to hold more capital, then to get a like-for-like return on capital you put up the price [and] putting up the price effects the demand equation,'' Mitchell explains. This is one of the reasons Reserve Bank governor Alan Bollard believes another housing bubble is not in the making.

Reserve Bank requirements are certainly adding additional costs.

''There's a limit to the amount of retail deposits in New Zealand and a very expensive wholesale market offshore,'' notes Mitchell.

However, it falls short of state-sanctioned assault.

What might constitute a slap across the banking sector's jowly chops is the fee the regulator extracts for guaranteeing retail deposits and wholesale funding. In the year to June, according to Treasury figures, banks and financial institutions have paid $74 million and owe another $154m - a $228m liability. That's got to sting. Treasury will continue to rake in millions until the scheme expires on October 12. Then, a replacement
guarantee runs until December 2011.

Who knows how much the final bill will be, but in 18 months the banks have paid out Inland Revenue, are holding more capital at an additional but undetermined cost and are forking out for the guarantee.

Bashing banks is proving good for government accounts and, one way or another, a vengeful public is getting its pound of flesh. Does it taste good?

Nick Smith is a senior financial journalist.

- © Fairfax NZ News