Lifting caps on banker pay now would be a bicycle kick of a political own goal

Brian Hayes, the main lobbyist for Irish banking, said last month that “political courage” was needed to lift State-imposed caps on bankers pay. At a time when many workers outside of white-collar professions are under pressure to accept cuts to real wages, and as financial regulators also hand out record fines to banks for filching from their customers, it would be more than politically brave to lift the restrictions now. For the Government, it would be political suicidal.

Amid the massif of political hills that the current crop of ministers could seek to die on, boosting the pay of Irish bankers at a time of national financial strain would be a bizarre and pointless choice with zero payback – a bicycle kick of an own goal. It will be very surprising if the public consultation on bankers’ pay that ends in two weeks gives enough political cover to end the status quo. The remuneration of Irish banking’s biggest earners could be capped for a long time to come.

The €96.7 million fine levied this week by the Central Bank on AIB and EBS is the biggest penalty handed out so far over the tracker mortgage scandal, which has cost the entire sector more than €1 billion in various costs. But it is also the latest reminder that a rotten culture of indifference towards vulnerable customers persists in Irish banking. That isn’t blind ideological gurning. It is a logical, dispassionate deduction in response to the sector’s regulatory rap sheet.

The tracker mortgage scandal wasn’t some fat-fingered administrative error. It was the systematic and calculated deprivation of consumer rights by taking borrowers off cheaper mortgage rates to which they were legally entitled. All the Irish banks were at it. The sector here still has a culture problem – regulators made the same deduction in a report barely four years ago, and little has changed since. It is in the public interest to sit on the sector, and capping pay is part of that.

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It is against this sort of underwhelming background that the Irish banking industry is pushing the Government to loosen the €500,000 salary limit and the effective bonus ban (delivered via a punitive 89 per cent bonus tax) that affects AIB, Bank of Ireland and Permanent TSB. The Government has asked the public for its views on this, and a range of other banking matters, in a consultation that ends on July 8th.

The Banking and Payments Federation of Ireland (BPFI), the sectoral lobby group that Hayes leads, argues that the 13-year-old pay restrictions put the three indigenous institutions at a competitive disadvantage. The industry says it leads to an executive talent drain while the bonus ban makes it harder to hire in-demand professionals such as software designers and other technical staff, which could damage the bank’s future prospects.

Industry analysts point to the exit of senior bankers such as Francesca McDonagh, the outgoing Bank of Ireland chief executive who is leaving for a senior role in Credit Suisse, as proof that the pay caps are having a negative impact on Irish banks. McDonagh, a staunch critic of the pay caps, had an exemption from the regime and was paid close to €1 million. But she had also led Bank of Ireland for five years, which is a fairly average tenure for a chief executive. Who is to say she wouldn’t be leaving around now anyway?

The constant hum of opposition to the pay caps from within the sector is understandable and it surely does make life more difficult for Irish banks when it comes to recruitment and retention. The institutions want the flexibility to be able to hire the best executives internationally.

Risk-taking

But it is necessary to go back to the reason why the bankers’ pay caps were introduced in the first place – to protect the Irish public from the potential consequences of the risk-taking behaviour of bankers. Taxpayers, via the State and the Government, are entitled to take a robust position on this matter, as taxpayers are the underwriters-in-perpetuity of the entire Irish banking system. That principle, lest it was ever in doubt, was underlined during the financial crisis over a decade ago, when public money was pumped in for bank bailouts.

The pay caps were instituted in the public interest. So it is up to the bankers who want the rules changed to show why it is now in the public interest for the restrictions to be lifted. While the caps may be bad for bankers, there is barely a screed of credible evidence that they are damaging the interests of Irish taxpayers in any whatsoever. While this remains the case, why should the caps be changed?

The existence of the pay caps hasn’t dented market confidence in the Irish banks, for example. The share price of Bank of Ireland is up by 30 per cent since the start of the year, while the share price of AIB, in which the State still holds a majority stake, is up by a fifth. If the banks were being terminally weakened by the pay caps, would it not show up in the market value of the institutions?

Nor have the pay caps made the banks dysfunctional in the market. Broadly speaking, the banks are servicing the Irish market reasonably well at the moment. There is no shortage of credit. It may be expensive to borrow in Ireland, for sure, but that isn’t because of the pay caps. It is down to the depth of the capital buffers Irish banks must hold, as well as the propensity since the crash for Irish households to save their money rather than borrow and spend, as they did before.

Foreign banks are fleeing the Irish market, leaving AIB, Bank of Ireland and PTSB in an increasingly cosy competitive position, which is a concern because the banks will capitalise on it with their pricing. We are also heading into a cycle of interest rate increases, which will boost the profitability of Irish banks even further. If the economy avoids a major contraction, the banks could be in for a decent few years ahead.

The banks complain that the caps make them compete for talent with one hand tied behind their backs, as fintechs such as Revolut take over parts of the market, such as digital payments. That may be inconvenient for the banks. But from the point of view of the rest of us, so what? As KBC and Ulster flee, it is in the interests of the Irish public that competitive pressure is brought to bear on the remaining banks.

The banks’ main argument for a change in the pay caps – that if it is bad for them, it could be bad for the rest of us – is not landing at the moment. The evidence is just not there. Until it is, why change things?