Mumbai: US President Barack Obama has proposed to tax 50 banks operating in the US to recover losses under the Troubled Asset Relief Program (Tarp), under which the government purchased assets and equity from them to strengthen the country’s financial sector. Tarp was the largest component of the government’s measures in 2008 to address the subprime mortgage crisis. Now, the government is using public policy as a punishment against the mega bank bonuses, and hopes to collect $90 billion (around Rs4.1 trillion) over the next 10 years. Expectedly, this is not going down well with most bank bosses. In an interview, Philip Hampton, chairman of the UK-based Royal Bank of Scotland Group Plc (RBS), discussed his thoughts on the issue. Edited excerpts:

Mismanaged giants: Royal Bank of Scotland Group chairman Philip Hampton says it’s hard to defend the way a number of banks are run. Lloyds TSB via Bloomberg

What would be the impact of President Obama’s announcement on RBS? Will it evoke protest from the 15 non-US banks that will be affected?

I do not know enough about the Obama announcement yet to give you a clear formulated answer on that. The initial impression is that this won’t be particularly material for RBS but may be material for some other banks. We have to see precisely what is spelled out and go through a proper analysis of the situation.

If a private equity fund had bailed you out, it would have taken more than its fair share from the capital it lent to you. When the taxpayer has done the same, isn’t it fair that it demands something on the same lines?

The way a number of banks are run is quite hard to defend. They should not have been managed in that sort of way, where the taxpayer does come in to rescue banks that are deemed to be too big to fail for the sake of the strength of the financial system.

I think it’s right that (the) taxpayer should expect to get fully reimbursed. It is the thrust of what President Obama has said and the British government’s position that they expect to get their money back from the bank bailout absolutely.

What is your stand on the bonus taxes that the British government itself has imposed?

There has been huge amount of media attention in the US, in most countries in western Europe and other parts of the world about bankers’ pay, bankers’ bonuses—particularly in the light of all the taxpayers bailouts that have taken place, particularly in the US and western Europe.

As a chairman of a big bank, I can understand that there is a public concern. We receive quite a lot of public money and the issues are understandable by everybody. However, it’s clear to everyone and to the board of RBS that if we are going to be an effective commercial operation, which is what we need to be in the interest of all of our shareholders, government shareholders and private shareholders, we need to pay people at the right level. You cannot run a big international complex organization for any period of time sensibly and safely paying people below the market rate.

Eventually, that will tell in terms of quality of performance for business. Last year, we had a big difficult round of discussions with the UK government about bonuses. Eventually, we reached a settlement that everybody was sufficiently comfortable with. We will do that again this year.

Now that at least two major financial centres are moving towards taxing bonuses, will the market define bonuses differently?

Possibly, I do not think it’s clear yet. The UK bonus tax is not spelt out completely in black and white. The French are also saying they are going to have some sort of bonus tax. We will see how many other countries get on that route. As far as the UK is concerned, it’s just one year. This is not an endemic or going to be a persistent thing. They do believe that the banks have done particularly well in the immediate wake of bailouts.

Therefore, they think high bonuses were to carry some penalty. I think that’s the argument. I think there are quite a lot of things that are very uncertain about banking at the moment and pay is one of them. Historically, bankers have been highly paid—going back over many years.

The recovery of the banks seems to be less the result of the performance of their bankers and more on account of central bankers and the government. How do you justify the bonuses then?

I sympathize with that view, but only up to a point. The basis business works on is pay for performance. If you are part of the contribution towards the strong financial performance, then you should participate in that performance. The performance has been strong. Therefore, I think proper element of participation in the strength of that performance is right. Whether there is an element of windfall about this or skill about it, some banks have done better than others.

Some banks have positioned themselves better than others. So I would rather stick to simple principle that if you or the organization performs well, then you should get some participation in it. If it performs badly, it’s absolutely (the) key principle of RBS’ payment processes that we do not want payment for failure. So if you perform badly and you are fired then you do not get very much money and those principles are very important.

Would you say, going by the events of these last two-three years, the chances are that the market itself will mellow and bank bonuses will be designed more responsibly or with certain caveats?

Absolutely, those caveats will become very international. They have certainly been implemented with vigour in the London market. RBS leads the field in terms of implementing new ways of approaching bank bonuses. So very little or no cash bonuses are being paid.

All the bonuses are being paid in shares or stocks. If they do not turn out to be sustainable results, then the bonuses will be subject to claw back. In RBS, we now have a state-of-the-art system in terms of approaches to bonuses and that is being adopted by most other major banks in the world.