Taxpayer guarantees helped boost RBS bonuses

By Simon Duke for MailOnline
Updated: 05:34 EDT, 9 June 2011

The boss of Royal Bank of Scotland has admitted that pay deals for his staff have been inflated by the swathe of government guarantees underpinning the bailedout lender.

Admission: Hester said it was 'entirely' possible pay-outs had been inflated by government guarantees

Chief executive Stephen Hester said it was 'entirely possible' that the taxpayer 'subsidy' had helped push up bonuses across the bank.

Because the government safety net continues to underpin its vast loan book, RBS can borrow money more cheaply than it would otherwise be able to.

This 'implicit guarantee' effectively produces fatter profits and higher pay-outs for staff, the chief executive told the Treasury Select Committee yesterday.

Hester said: 'The subsidy could have fed through to lots of places - the price of loans, the general economy, employment in banks and bonuses.

'I assume there would have been some leakage to all the above. It's entirely possible.'

The extraordinary admission came as the bosses of Britain's four largest lenders appeared at the committee to discuss the proposed reforms outlined by the Independent Commission on Banking (ICB).

Business secretary Vince Cable told the business, innovation and skills select committee that he had written to bankers to demand evidence that executive pay was being linked to lending, as they promised under the Project Merlin deal.

ICB chairman Sir John Vickers estimated that, together, UK-based banks save at least £10bn a year on funding costs because of the expectation that taxpayers would step in again should disaster strike.

To eliminate these subsidies, Sir John wants to force banks to insulate their high street operations so that their riskier businesses would be allowed to fail without disrupting the flow of credit to households and firms.

There were sharp differences between the groups over the merits of ring-fenced retail banks.

HSBC chairman Douglas Flint said extra protection was 'required' to avoid a repeat of the 'tragic' slump in lending that followed the 2008 banking crash, but Hester argued ring-fencing retail banks could produce a welter of 'protected beasts' that could be encouraged to take excessive risks because of the state guarantees.

It would also drive up the price of loans and mortgages, he said.

To the surprise of some MPs, Barclays boss Bob Diamond claimed his firm's investment bank enjoyed no implicit guarantee from the taxpayer. Barclays Capital, he said, raised its own capital on money markets.

The new boss of Lloyds Banking Group said he will be sending out a sales brochure this week to would-be buyers of the 600 branches it is being forced to sell. Sir John Vickers wants Lloyds to off-load 'considerably' more than the 600 buildings mandated by Brussels following the bank's 2008 bailout.