I received an SMS alert a little while ago which indicated that the Central Bank was thinking of regulating the bonuses of bankers. This morning, we woke up to the fact that the Government has tightened its ownership of the Colombo Hilton.
Does this indicate that the state getting rather too large?
There have been calls for the regulation of bankers bonuses in Europe and America but this follows a banking collapse and the revelation of the sheer size of bonuses - in my limited experience the sales staff at investment banks used to take home bonuses that were measured in terms of several years of pay.
The argument for regulation is that:
a) they provided the wrong incentives, tempting traders to take very risky bets at shareholders expense (traders get a mega bonus if it works, shareholders take the loss if it fails);
b) since a number of the banks have now been bailed out by the various governments, the profits being earned are effectively subsidised by the Government (an implicit state guarantee allows for cheap borrowing, while some banks enjoyed a direct infusion of cheap/free state funds).
There is definitely a problem with bankers bonuses in Europe and America. As Roger Moffat, a former derivatives trader wrote in a letter to the Economist, "Trading isn’t hard. Computers do much of the work, and unless we break the culture of paying ridiculous bonuses for being “lucky”, the banks will continue to laugh in the face of politicians and regulators. Japanese housewife traders have led the way in showing us that frankly, it isn’t rocket science."
The question is whether this problem is prevalent in Sri Lanka. Sri Lanka has not suffered a banking crisis (although we have suffered a Finance Company crisis)and no banks were bailed out. I don't think bankers here receive huge payouts either, certainly not in terms of years of salary.
I'm told that some of the treasury bonuses are large and since at least one local bank suffered a major loss as a result of a poorly designed foreign exchange traded product, there may be a case for investigating whether the incentive scheme was at the root of the problem. However I have not seen any investigation into this (I may be wrong here) and certainly very little publicity about the incident, which, in true Sri Lankan style has been carefully covered up.
Is there a real problem with bankers bonuses? Or does this look like a case of over-regulation?
In the case of the Hilton, the owning company is supposed to have defaulted on payments of the lease and that as a result the land has been acquired by the Government. Strangely enough, according to the news report the company is controlled by the Government anyway, so why they did not push for the payment of the lease in the first place is a question.
It is also unclear as to what process was followed prior to the re-acquisition: was it as per clauses specified in the lease agreement? Was due notice given? If so why was it that the company, a listed entity did not make an announcement to the stock exchange? The news broke after Minister of Economics Development Basil Rajapaksa informed parliament that the Hilton Hotel Colombo had been taken over by the government last week.
In a society that is supposed to be governed by laws there is always a process that needs to be followed so that everyone concerned knows how things work. When the process is unclear it creates uncertainty and uncertainty is another name for risk. Investors are conditioned to expect B to follow A and C to follow B. If events suddenly arrive at E straight from A and no one knows what went on in between, then the investor will be lost.
The Hilton is a relatively well known name and a sudden change in its status will be picked up in the news and give the jitters to potential investors.