CITY FOCUS: It is business as usual in the Square Mile

 

Unemployment is soaring. An election is just around the corner. And Labour is miles behind in the opinion polls.

It's little wonder then that the government has chosen this moment to step up its assault on bank bonuses.

Chancellor Alistair Darling yesterday launched his most outspoken attack yet on the culture of 'greed and recklessness' that has brought penury to millions around the world.

City shame: Alistair Darling has launched his toughest assault yet on banker greed

City shame: Alistair Darling has launched his toughest assault yet on banker greed

Addressing his demoralised troops at Labour's annual conference in Brighton, Darling vowed that there would be 'no return to business as usual' in the Square Mile.

'Automatic bonuses year after year' would be outlawed in forthcoming banking legislation, along with ' immediate pay-outs' for top executives.

In the future, payments will be staggered over many years, and there will be provision to 'claw back' bonuses that turn out to have been unmerited, Darling signalled.

Given Labour's acute need to reconnect with voters, the Chancellor's crackdown wasn't entirely a surprise.

Bank bashing has, after all, become the national obsession. The public is still angered by Britain's profligate banks for fostering the most severe recession in generations.

But for all the heightened rhetoric the Chancellor employed yesterday (and that marked out the weekend communique from the G20) ' business as usual' does appear to have returned with a vengeance in the Square Mile.

A year on from the collapse of Lehman and ensuing financial meltdown, banks like Goldman Sachs are preparing to pay out record bonuses to staff.

Vastly diminished competition has ensured that the survivors are earning mammoth profits from the record amounts of debt being issued by governments around the world.

Fat cats still getting the cream

Darling, it would seem, is powerless to stop them. His pay reforms won't come into effect until after banks pay their bonuses at the turn of the year - meaning a bumper Christmas is in store for the City's top bankers.

Instead, he is relying on using his powers of persuasion to get British banks to act with restraint come bonus time.

The heads of remuneration at HSBC, Lloyds, Barclays and RBS are being dragged into the Treasury this week with the aim of bringing their 2009 bonuses into line with the straitened economic times.

From next year, UK-based banks may have to work under a tighter regulatory regime.

Darling is expected to force banks to reveal how many of their staff earn board-level salaries and above - an idea floated in a government report into corporate governance by Sir David Walker. More importantly-banks that encourage their staff to take huge risks will be forced to carry much bigger loss absorbers in the future.

These capital adequacy rules are something the banks 'just won't be able to avoid', according to Nick Dent, a partner at law firm Barlow, Lyde and Gilbert. 'This is the real teeth of this bonus issue,' said Dent.

However, it was telling that Darling stopped far short of proposing a pay cap for individual bankers - despite the widespread outrage at the grotesque deals given to many City high flyers.

One City source said: 'I can't see a way to cap salaries that wouldn't fall foul of employment law.'

Even if it were possible to curb individual pay deals, foreign banks operating in the City would find ways to circumvent them. One option would be to set up a 'brass plate' headquarters in a less onerous jurisdiction.

Doing this would give a bank greater leeway on pay, while also preserving their operations in London.

If the government moves before securing an international agreement, footloose overseas banks could simply up sticks to Frankfurt, Paris or Amsterdam. This is a scenario Darling is desperate to avoid.

The crisis may have cruelly exposed Britain's over-reliance on the City. But a thriving financial services industry will be essential if the government is to get on top of the ballooning national debt.

The banks will have a powerful hand to play as the debate over City pay rages on.

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