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Bank boom ends

• Robert Peston
• 27 Feb 08, 09:37 AM

I am not surprised there has been a sharp fall in the HBOS share price this morning. The squeeze on its margin in retail banking was very pronounced. and are now smaller than those of its corporate banking operation (which is astonishing for a bank whose core is the old Halifax building society).

When you add that to what Hector Sants, chief executive of the Financial Services Authority, said to me this morning about how the cost of money for banks has risen on a permanent basis, well it all adds up to a pretty gloomy outlook for banks’ profitability.

Predictably, shares in and (whose results are tomorrow) also fell pretty sharply.

For banks dependent on providing mortgages, loans and other banking services to millions of British consumers, there has not just been a downturn in the cycle – but, as Sants pointed out, the prospects for them have become altogether more dull on a permanent basis.

Sants himself is rather pleased about that. The end of the era of cheap debt means that fewer of us will be tempted to borrow too much.

But it probably means that the owners of banks, their shareholders, will receive lower returns. And it may well slow the growth of the economy for some years.

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FSA and bankers' bonuses

• Robert Peston
• 27 Feb 08, 06:42 AM

In his interview with me for this morning's Today Programme, the leader of the City's pack of watchdogs came intriguingly close to saying that the economic mess we're in stems from bankers' greed and the foolishness of those who negotiate their remuneration. (You can listen to the interview here.)

, the chief executive of the , said that the way bankers are rewarded is not helpful to financial stability and magnified risks for their respective firms.

Which, from an habitually cautious regulator, represents a sound ticking off for the City.

What bothers him is the so-called assymetry of bankers' rewards.

Bankers received fat bonuses, often running to millions, for their deals, most relevantly the parcelling up of dodgy loans for sale as supposedly rock-solid bonds to international investors.

But when those bonds turned out to be radioactive duds, foisting big losses on their holders - including the banks that employed the clever-clogs bankers - there was no way of reclaiming those bonuses.

The creators of the toxic investments had already trousered their fat wedges - and there was no way to reclaim any of this cash.

In crude terms, they had been given the banks' capital to gamble in a game of global roulette. Before the wheel stopped turning, they were rewarded as though their bet on red had come good. But when the ball finally kerplunked in a black slot, well they and the moolah were long gone.

As Mr Sants says, these systems for incentivising bankers were - ahem - a bit too short-termist.

So what should the FSA do? Should it, as some commentators believe, directly regulate bankers pay, to prevent this kind of dangerous silliness.

Mr Sants - who in his previous life as a successful investment banker received rather more than a bob or three in bonuses - thinks not.

He would hope that the banks' owners, their shareholders, would insist that bonuses were linked much more closely to the long-term performance of individual bankers.

But if shareholders fail to act, so be it. He believes it would not be appropriate for the FSA to intervene in a commercial, competitive issue of this sort.

It's every banks' fundamental right, the FSA seems to believe, to be gulled by its brightest and best employees.

Many would agree. Too much nannying is bad for us all - although arguably banks' licence to be foolish should be restricted as and when that foolishness harms all our economic prospects, as it may have done in the debt bubble that has just been burst.

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