Sir Paul Tucker said that markets needed reforming
Sir Paul Tucker: ‘Bankers are paid an extraordinary amount of money for an industry that doesn’t make its cost of equity’ © FINANCIAL TIMES

Weaknesses that emerged in the bond market at the height of the pandemic-induced market ructions in March must be “dealt with” and bankers’ pay is due an “adjustment”, Paul Tucker has said.

Speaking at the Financial Times Global Banking Summit, Sir Paul — the former Bank of England deputy governor who now chairs the Systemic Risk Council, an advisory body — said the turmoil in the US government bond market this spring showed that trades which rely on heavy levels of borrowing remain a serious issue.

The $20tn Treasury market, which is considered to be one of the world’s safest shelters during periods of market turbulence, endured a powerful wave of selling in March that caused wide price swings. The dislocations in the typically deep and liquid corner of the market triggered a series of aggressive interventions by the Federal Reserve to avoid a broader breakdown across global financial markets.

The Financial Stability Board, a rulemaking body, earlier this month said it was examining the role hedge funds that use large amounts of leverage in trades that take advantage of the difference in price between Treasuries and derivatives linked to the asset played in the tumult.

Sir Paul said the problem partly had to do with “market design”, but also said that hedge funds and other investors had incentives to borrow heavily and “leverage up”.

“It got bailed out yet again — the Federal Reserve bailed out a lot of finance in the spring . . . if the public realised that, they would be even more annoyed,” he argued. “This has to be dealt with.”

Call for reappraisal of bankers’ pay

A banking industry that continues to pay its executives highly while performing poorly may also need reappraising, he suggested. Bank share prices, which have recovered since the worst of the crisis, did not reflect the banks’ own returns on equity.

“Bankers are paid an extraordinary amount of money for an industry that doesn’t make its cost of equity,” Sir Paul said. “It is striking there hasn’t been an adjustment there.”

Later at the same event, Citigroup chief financial officer Mark Mason said that while his bank would “think through” the optics of paying big bonuses to traders in such a challenging economic environment, trading businesses enjoyed “very strong performance” this year, which had continued into the fourth quarter.

“When it comes to pay, we obviously operate in a competitive environment and we have to take that into consideration, along with what company-level performance and profitability and returns look like,” Mr Mason said, adding that Citi has been profitable this year.

Meanwhile Jon Pruzan, chief financial officer at Morgan Stanley, said the bank’s clients were “very active and engaged”.

Mr Tucker said banks are likely to struggle further as the impact of the pandemic on their loan books becomes clearer.

“The things that don’t look so good . . . will be non-performing loans for banks and others — that’s unavoidable [and] no one can know . . . how much they will be,” he said.

“No one knows how to value a loan portfolio in a pandemic because in the 17th century they didn’t have loans books of that size.” Both Citi’s Mr Mason and Commerzbank’s chief financial officer Bettina Orlopp stressed that their banks had already made substantial provisions to deal with potential loan losses.

Mr Tucker indicated that economic recovery would come more quickly thanks to recent breakthroughs in vaccine development — although expecting a “V-shaped” recovery remained “beyond stupid”. 

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