Take care of excessive banking profits, and the excessive bonuses will take care of themselves.

The City operates like the feudal barons of the middle ages, who oppressively taxed their peasants but once a year would give away a roasted ox at the village fete. The dimmer citizens would be greatly appreciative of this annual generosity, forgetting that it was paid for by the oppressive taxes imposed by the generous barons. In the twenty odd years that bankers started robbing their own banks by carting out cash in bonus-bags,  politicians - in a state of distracted incomprehension - have claimed that the banks should be allowed to make profit because they contribute so much tax. But lets look at the figures here.

Whole Financial Sector total corporation tax in 2007 = £12.17 billion (from a report done by PWC for the City of London Corporation in Dec 2008).

In a press release in October 2010, Which?, the consumer magazine, reported "Savers are missing out on £12 billion a year by keeping their money in accounts that pay miserly rates, according to new Which? research."


With this single scam reported by Which?, UK banks cover virtually the entire the cost of their corporation tax. This lets them pocket the proceeds of all their other excessive charges (e.g. pension fund charges) and penalties (e.g. unauthorised overdrafts). 

The problem with the banks is not the level of bonuses, but the level of profits that pay for the bonuses. The entire economy is oppressively taxed by the banks by their high charges, which bring them their huge profits. High charges imposed on people saving for the pensions, companies buying financial services – you need look no further than the recent escapade by Prudential failing to buy AIA, in which it was charged £297.4m by banks in advisory, underwriting and other fees related to the aborted transaction. Smaller companies would typically cede a much greater percentage. And for ordinary citizens, the maths will show you that someone saving for 40 years for their pension can lose almost half their investment in bank charges by the time they retire.

No doubt the banks provide a vital service, but as there is no competition comparable to that between the supermarkets, they charge way too much. As a direct result, the high cost either discourages people and companies from using the service, or provides extremely poor value to them – such as the dreadful returns on personal pensions.

Woe upon woe, the inflation of the top bankers' salaries provides an excuse to the top executives of other sectors to pay themselves more – putting their prices up, and leaving less for the shareholders and for the less exalted staff. Why, they ask themselves, if the bankers can earn salaries with all those zeros after the first few integers for doing nothing special, can’t I?

The much repeated lie that it is the shareholders who should influence the banks was exposed when the protests of the 70% shareholder of RBS, i.e. the Government, were ignored as no more important than pips squeaking. If the 70% shareholder can be ignored, how much influence would even a pension fund holding a couple of percent have?

And why on earth are we relying on the pension funds, impotent though they would be? Fund managers, regularly interviewed on broadcast media, sagely agree with the show’s presenter that pensions funds should press the banks to behave more soberly. Only once have I heard a radio presenter with sufficient economic literacy to point out that the fund manager is a wolf in wolf’s clothing – and is hardly likely to try very hard to pull down his twin's pay as it would bring down his own with it.

The problem with the banks is not the level of bonuses, but the level of profits that pay for the bonuses. The government should allow market forces to bring down the level of profits.

How? Well, the government owns large parts of major banks. Requiring these banks to bring down their charges will bring market forces to bear on the other banks. The benefits will be seen by pensioners getting better returns, industry being able to afford the banking services to help them thrive, and sanity being brought back to boardrooms around the world.

Of course, this won’t make things right by itself. But without this, things will never be right.