Monday, 28 June 2010

UK & US Banks: Profits Down while Staff Salaries Rise

BBC journalist Robert Peston's Will banks' medicine kill them (and us?) notes a link to the Bank of England report The resilience of UK banks which contains the troubling chart copied below.

Huh? Salaries on a steady and quite rapid rise as a percentage of revenue? It seems that UK bankers - the people not the institution - are avoiding the financial pain imposed upon the rest of the public from the crisis. The bankers, the individuals, the people at the banks who made the monumental errors of judgment, or who perhaps in some cases deliberately ignored the risks they took because it was a no-lose situation for them personally, are not suffering. They continue to power ahead, siphoning off an ever greater share of bank revenue.

It appears that it is much the same with US banks - this January 2010, NY Times story Ailing Banks Favor Salaries Over Shareholders finds the same pattern with a number of the major US banks.

Meantime, Canada's biggest bank RBC paid out 35% of revenue in 2007 on staff costs but only 31% in 2009. Without knowing exhaustively whether this pattern holds true for all Canadian banks over more years, one wonders if a reason Canadian banks fared so much better than UK and US banks also had something to do with bank "culture" where employees and managers think of themselves differently and act accordingly.

Unfortunately, the financial system reforms (bank taxes and increased capital requirements) the G20 / 8 countries are looking at seem unlikely to influence a change in the self-enriching, risk-taking behaviour of bankers in the UK and the USA. If the individuals don't get hammered when they screw up, why would they change their way of doing things? There is a great ad byline from Dofasco that goes "our product is steel, our strength is people." Sadly, for many banks, that thought instead is, "our product is lending, our weakness is people".


Michael James said...

Is this just a consequence of revenue having dropped? If a bank's revenue dropped 20% and they trimmed total salary payments by 10%, then the percentage of revenue that goes to salary will go up.

CanadianInvestor said...

MJ, isn't cutting only 10% while business is down 20% exactly a case of the employees getting off more lightly? As well, in the case of UK banks at least, there was a sustained increase in staff cost burden during the good years preceding the 2008 crash when revenues were going up. When I see bank execs today saying they must keep the "talent" it says to me the wrong mentality is still there. Remember the good ole days of the tech crash layoffs? - no matter how good you were, when whole divisions were being wiped out, it was everyone axed. Not so in banking it seems, The absence of consequences for bankers as harsh as the damage done to the real economy / everyone else leaves open the question whether any "never happen again" lessons have been learned in that industry. It would be interesting in that context to see a survey of banker personal current net worth statements.

Michael James said...

I'm not claiming that any particular set of banks has acted properly or improperly. However, it seems to me that bank revenue would likely be more volatile than bank payroll. It doesn't make sense to me for a stable business to be able to cut payroll costs by 20% if they experience a sudden 20% revenue drop. It is difficult to hire and fire people quickly. This would mean that as revenue rises, payroll should rise more slowly (or at least lag for a while), and when revenue drops, payroll should drop more slowly. Of course, over time, they have to stay in balance. If I'm right about this, then a reasonably-run bank would see payroll drop by less than revenue drops in bad times. Similarly, payroll increases should lag revenue increases in good times.

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