Of Bank Rates and Bonuses

As the banking industry weighs its options for fighting the proposed federal tax on large institutions, it’s worth looking at one of the underlying issues which prompted the proposal — executive bonuses.

Ostensibly, the purpose of the tax is to recoup some of the money spent on rescuing the banking industry, and in doing so start to address a federal budget decificit which has ballooned over the past decade. Politcially though, what gives the proposed tax some real momentum is outrage over the bonuses being paid to Wall Street executives so soon after many of their firms had to be rescued from the brink of disaster.

This issue concerns depositors, because those bonuses can indirectly impact savings account rates, money market rates, and CD rates. Basically, it is a question of balancing competing costs – should a bank put more resources into attracting depositors with higher bank rates, or should they use those resources to reward executives? Guess which option the executives have chosen.

The size of some of the bonuses being paid is highly questionable as a business decision, but that’s just the point — it’s a business decision, not something that should be legislated. To get at the root of the matter, the government might be better served to pass legislation addressing corporate governance rules. It is the bank shareholders who should be up in arms when inappropriate bonuses are paid, but too often corporate proxy procedures make it difficult for shareholders to use their voting power for anything other than a rubber stamp of proposals from boards of directors. Opening the door to more shareholder activism could keep the executives honest — not just in the banking industry, but in other lines of business as well.

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