Banks need a foot in the real world

February 16, 2009

Who, running a small business, would be able to pay out bonuses if they were begging the bank to extend credit terms because the business wasn’t making enough money to balance the books?  The owner of a small business feels bad if he can’t reward hard working staff but he knows he has to return the business to a viable state before there’s money for bonuses. Why should things be different for a loss-making bank subsidised by the government? The priority should be to return the bank’s business to viability, not to to use the subsidy to pretend that the problem doesn’t exist. If that means that hard working staff don’t get a bonus, so be it. After all, many hard working taxpayers in other sectors  face short working hours or redundancy, bank workers are not a special case.

If a government steps in to act as the bankers’ banker, the government has a duty to act as a responsible banker. The government should have a clear purpose in mind when it makes the loan and the purpose should be a condition of the loan. The government should know how to tell if that purpose is being fulfilled. And, given that the money comes from the public purse, the criteria should be visible to the public who fund the rescue package.