Incentivising banks to deliver higher share prices reveals dangerous conflicts of interest at the heart of UK policy
by Dr. Ros Altmann
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22 June 2009
Incentivising RBS chief to get the share price up to 70p may be against the public interest
Yardsticks of success used by the stock market, are not those which one would necessarily wish to lie at the heart of Government policy.
Achieving higher bank share prices is inconsistent with the aims of Quantitative Easing
Saving the banks was supposed to be a means to an end, but it seems to have become an end in itself
Pension funds ended up in trouble by over-relying on the stock market – Government policy on the banks is running even bigger risks for taxpayers
The near £10m pay package for Royal Bank of Scotland’s chief executive has generated much comment, but concern should not be about the amount Stephen Hester might earn. It should be about the conflicts of interest involved in incentivising him to get the RBS share price up to 70p. Helping bank share prices is not the same as helping the economy. Rather than being encouraged to lend to struggling companies or to control charges and margins, the RBS boss is being incentivised to please the stock market.
Share prices are not a suitable policy target. In April 2008, RBS new shares were issued at 200p. Just a few months ago, in November 2008, the Government bought 22.9bn new shares in RBS at 65.5p (when the market price was 55p). This actually makes 70p look a relatively unambitious target – especially as RBS now has a quasi-Government guarantee. Even if the RBS share price does hit 70p, is that really an outcome worth paying millions for? Why is the share price the most relevant measure to incentivised at the moment?
In fact, the yardsticks of success used by equity markets are not those which one would necessarily wish to lie at the heart of Government policy. And it seems to me that they conflict with the aims of monetary policy.
The Bank of England has printed billions of pounds worth of new money – in order to ensure that that our banks start lending again to parts of the economy in desperate need of credit. But, trying to engineer a higher share price will make banks far more likely to err on the side of caution when assessing loan applications, risking the failure of many viable businesses.
Saving the banks was supposed to be a means to an end, but it seems to have become an end in itself.
Having gambled so many billions of pounds of taxpayers money on a handful of shares in just one stock market, the Treasury is, of course, desperate to appear to have been ‘successful’. But a rise in share price is not an adequate measure of success – and paper profits are not sufficient either.
Over-reliance on the equity market performance has already inflicted huge damage on UK pension funds. Continuing this ‘blind faith’ in the stock market as an incentive mechanism for partially nationalised banks, in the midst of an economic crisis, may be running even bigger risks for our economy. At this time, we need banks that are willing to lend at affordable rates, banks that treat customers fairly, not banks who are saddled with legacy bad loans and desperate to offset past losses with higher charges in order to engineer a higher share price.
Mervyn King is right to warn of the inadequacies of the current banking system. In the absence of a state bank, we should be encouraging the partially nationalised financial institutions to help support the wider economy, in exchange for taxpayer funding. Aiming for a paper profit on bank shares will jeopardise other policy aims and will not ensure a sustainable long-term UK recovery.
Dr. Ros Altmann