Leading article: The banks must be forced to put their house in order

Ministers should impose sanity over bonuses and lending

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The economy might not be experiencing a V-shaped recovery, but the banks which helped to cause this crisis certainly appear to be. Some of the largest investment banks on Wall Street have reported hefty profits in recent weeks. They were followed yesterday by Barclays and HSBC.

So are these results cause for congratulation for the managements of these institutions? Hardly. It is not surprising that banks – particularly those with large investment banking divisions – are making profits given how much public help they have had in recent months. Wall Street has had unprecedented assistance from the Federal Reserve in the US in the form of cheap borrowing and special support programmes.

Similar state help has been granted here in the UK. Barclays and HSBC did not take capital from the Government, but they did avail themselves of the Bank of England's Special Liquidity Scheme. This support, along with the blanket public guarantee of their liabilities, has driven down the banks' cost of capital. New evidence also suggests investment banks on both sides of the Atlantic are making a killing from central bank quantitative easing schemes.

In this context of massive public sector support, it is scandalous that the practice of paying staff excessive bonuses persists. These bankers should really be paying back their bonuses of previous years which, as we now see, were based on illusory profits, not raking in new ones.

Just as seriously, the banking sector continues to starve the real economy of credit. No one expects the banks to lend to failing companies. But reports from the Bank of England show that perfectly viable small and medium-sized businesses are facing penal terms from the banks when they attempt to access the credit they need to survive. Many are being driven to the wall by this contraction of lending. Banks are reducing lending in order to restructure their ravaged balance sheets. But this is doing terrible damage to the real economy. Everyone agrees that banks need to hold more capital as a buffer against losses. But that process of reserve accumulation needs to take place in the good times, not in the trough of a slump.

The case for Government intervention on both remuneration and lending is overwhelming. Yet ministers are loath to take serious action on either front. UK Financial Investments, which controls the taxpayers' stake in the Royal Bank of Scotland and Lloyds, has been supine. The City minister, Lord Myners, is right to call for greater transparency from the big banks on remuneration practices. But rather than suggesting a change of culture, the Government should be imposing it, working with other national authorities.

Similarly, the Chancellor of the Exchequer, Alistair Darling, should not be requesting that banks increase their lending to struggling businesses, but mandating it as a price of the special support the sector has received. Mr Darling also needs to reconsider his refusal to break up banking empires. We can never hope to have stability while banks' "casino" trading operations are under the same roof as their retail banking functions.

The banks have evidently learnt nothing from the great bust of 2008. But, still more worryingly, it seems that neither have our political leaders.

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