Leaner year for bank bonuses as more euro chaos looms

Governor of the Bank of England, Sir Mervyn King, said commercial banks should consider limiting bonuses and building up their reserves to protect themselves against the turmoil in the eurozone.

But Channel 4 News has been told that bonuses at RBS and Barclays are likely to be lower this year than in 2010 because results have not been as good.

The downward pressure on bonuses is also likely to affect staff at other British banks. Angela Knight, the head of the BBA, which represents British banks, said in her blog on Friday: “Bank bonuses are shrinking. All of the indicators are that we are no longer in big bonus territory. Expectations are that the coming bonus season may well show a significant reduction in the amount of remuneration paid out.”

2,800 millionaires

In 2009, 2,800 bankers working in London for 27 banks received more than £1m each in bonuses.

RBS, which is 82 per cent owned by the taxpayer after being bailed out in 2008, paid out £1bn in bonuses last year. The expectation is that the 2011 bonus pot will be substantially lower.

Barclays, which did not need to be bailed out during the credit crunch, is believed to have made bonus payments of £2bn in 2010. This figure is also likely to fall.

Sir Mervyn said on Thursday that banks might have to “give serious consideration to raising external capital in the coming months”.

RBS believes increasing regulation makes attracting private investment more difficult. Without this, in the event of a eurozone collapse, it is thought that the bank would need to turn to the taxpayer for financial support.

More from Channel 4 News: New treaty to prop up eurozone?

Loans of £160bn

With loans of £15bn, RBS and other British banks are not heavily exposed to vulnerable eurozone governments. But they are owed £160bn in loans to companies and individuals.

RBS is most exposed in Ireland: it is owed £42bn by banks, companies and individuals there. Barclays has made similar loans in Spain (£25bn) and Italy (£22bn).

But both banks are well capitalised by European standards, as Sir Mervyn made clear. Some banks are trying to raise money through share issues and the sale of assets, but are finding it difficult to do so.

If it was an individual country, the currency would have collapsed though the floor two or three months ago. Alex Potter, Berenberg Bank

Alex Potter, an analyst at Berenberg Bank in London, said British banks were in a “very healthy position”. But the problem was that in a system that relied on trust, “you can never have enough capital”.

Euro

Mr Potter criticised the eurozone for taking too long to sort out its debt problems. “If it was an individual country, the currency would have collapsed though the floor two or three months ago. The euro is holding together countries that would have gone to the IMF.”

Mr Potter said to protect themselves, British banks could reduce their loans to eurozone banks, but this would not be a cost-free option. “There’s no way of restricting your exposure to them without exacerbating the eurozone’s problems,” he said.