Leading article: Two scapegoats do not add up to banking reform

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After all the commotion this week, one could be forgiven for thinking Britain's entire banking industry revolves around Sir Fred Goodwin's knighthood and Stephen Hester's bonus.

It is time to calm the hysteria, call off the witch-hunt and resist the temptation to do down one of Britain's most successful industries just when we need it the most.

On the matter of Mr Hester, the Prime Minister must take some of the blame. Downing Street is now denying David Cameron's involvement in pay discussions at Royal Bank of Scotland, which is 82 per cent owned by the taxpayer. But by allowing hints that he was pushing for the chief executive's bonus to be kept below the symbolic £1m mark, Mr Cameron helped to shape an outcome that is the worst of both worlds. For Mr Hester, as a senior figure in a highly paid industry, the £963,000 worth of shares he will receive on top of his £1.2m salary is far from generous. For the general public, it may be nominally less than £1m, but it still looks like excess.

The strongest case for trimming Mr Hester's bonus is that the Government should set an example. It is a superficially appealing argument, but one that is full of holes. The first is Mr Hester's contract: given that he is doing his job well, rewriting the terms and conditions cannot be either legally or morally justified. Then there is the likely outcome. Mr Hester does not need the job. If he is not paid in line with his market value then he, and perhaps his board, may take their services elsewhere. With RBS in need of major reform, a cheaper but less competent chief executive is hardly the best way to safeguard taxpayers' money. Even less so because it would achieve so little. However restrained pay might be at RBS, why should Bob Diamond at Barclays, say, take any notice?

Mr Hester is not the only banker under fire. There is also growing clamour for Sir Fred, his predecessor at RBS, to lose his knighthood. Again, the case appears to be simple: Sir Fred was honoured for services to banking; his bank failed at great public expense; therefore, he should be stripped of his gong. But again, there are more questions than answers. While Sir Fred may have been reckless, there is no evidence he broke the law. Meanwhile, others who have – such as Lord Browne (who admitted perjury) and Lord Archer (who went to jail for it) – retain their honours. How is Sir Fred less worthy? And what, then, about other ennobled bankers touched by the meltdown – Sir Victor Blank, the former chairman of Lloyds, for example?

Logic is not at work here. Rather, both Sir Fred and Mr Hester are being made scapegoats. It must stop. Outrage at the excesses that led to the crisis may be understandable. But emotion is being allowed to out-shout reason. Indeed, such unchecked vitriol risks damaging one of Britain's few truly world-class industries. It may be fashionable to blame bankers for all Britain's economic ills, and to talk of the resurgence of manufacturing as if talk were all that was required, but the City of London remains central to our economy and is something of which we should be proud.

That is not to say that bankers' pay is not grossly out of kilter. But it is not up to the Government to remedy it. The problem with banking is neither Sir Fred nor Mr Hester; it is the culture of the industry as a whole. As such, change can come only from within. That means regulation and reform, via the Bank of England, the Financial Services Authority and its successors. Not as eye-catching as a bust-up over Mr Hester, of course, nor with the same political dividend as cutting Fred the Shred down to size. But it is the only rational course. And what Britain's banks need more than anything is a dose of rationality.

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