Bill Blain’s very late Evening Porridge, 26^th October 2023: Why is the City of London in Terminal Decline?

“When one is tired of London, one is tired of life…… Where are my pyjamas?”

Banker Bonus Caps: the only part of Liz Truss’ economic suicide plan to survive contact with reality! They were pointless, and utterly meaningless and nothing to do with why London is losing its place as the epicentre of global finance. Yet abandoning them is yet another Rishi Sunak mistake!

 Dear Readers, please forgive the lack of Morning Porridge this morning, but my chum, the Editor of CapX, asked me for something on UK Banker Bonuses… Please press the link to read it on their site, but for the benefit of Lazy Porridge readers, here it is!

Why is the CITY OF LONDON in Terminal Decline?

One of the great difficulties being a moderately well-known Financial Strategist is resisting the urge to climb to the top of the City’s tallest building each morning and indulge in a bout of frustrated Primal Screaming. This is one such morning.

Yesterday, my chum Alys – the editor of CapX – asked me if I could contribute a few thoughts on whether the limits on Banker Bonuses are the main reason the City of London, the beating heart of the UK’s Economy, and still the financial epicentre of Europe, is in Terminal Decline.

It’s a good question. Has the stultifying dead-hand of EU bureaucracy held back Britain’s bankers’ natural gift for risk-taking, nurturing entrepreneurship, and financial wizardry? Probably not. Over-regulation and bad decisions by the authorities are certainly evident, but the broader reasons for the UK’s financial decline are legion – and that is why I really need to scream…  I’ve been warning about the UK’s path to financial irrelevance for decades.

The Banker Bonus Cap followed the last Global Financial Crisis by limiting banking fat cats to a max bonus twice their salary. The EU and central banks felt they should punish bankers for careless risk taking in the run up to the last financial crisis – and cut any alignment between taking bigger risks to be paid more! It was a meaningless guesture. Banks kept overpaying bankers by simply increasing their base salaries so they still got paid bigger bonuses. While everyone else got poorer – bankers continued to live high on the hog.

It was all so pointless. Banks were already irrelevant by the time the rule was enacted in 2014. If you are looking for financial brilliance, economic minds of the top rank, or insightful risk takes, the last place you would now look for such would be in the Banks of London. They have faded. They no longer take risk. They are self-satisfying bureaucracies managed to appease regulators by boards of risk managers, compliance officers, consultants, accountants, bean-sexers, diversity scorers and other such corporate drones. Financial acumen, trading prowess, or economic brilliance will destroy any young banker’s ability to succeed in the treacle of banking groupthink.

Successful risk takers, insightful financiers, and folk who actually understand the business of capitalism and growth, have all fled the banks. They are driving their personal wealth by funding smart entrepreneurs and new businesses from hedge funds, direct lenders and private equity/debt shops. They care not a jot for bank rules.

Next week the UK will abandon the banker bonus cap. It will have precisely no effect on the economy except to give His Majesty’s Loyal Opposition another opportunity to hurl abuse at Rishi Sunak, who yet again has done exactly the wrong thing.

The bonus cap is the only proposal of failed chancellor Kwasi Kwarteng (a man so fond of his own voice, he made his ears redundant) to have survived his swift fall into ignominy. The contrasting optics of bankers’ bonuses increasing even as the hoi polloi see their utility bills soar, their credit costs triple, inflation eat their income, and the jobs become vulnerable is just too horrible to contemplate. It’s yet another own goal benefitting Sir Keir Starmer.

It won’t even help bankers. They are about to get exactly what they deserve. It’s been a terrible year for deals and fees, thus bonuses are set to fall in line, and declining business means bankers are being lined up for the chop. Very senior bosses will do very well out of it – awarding themselves quint-squillions for doing little more than closing branches, cutting costs, axing staff and signing off on ‘due to the high volume of calls’ messages to torture their customers.

Why is the UK’s reputation for financial excellence in such danger?

The UK’s position in the World has naturally evolved – not positively. One hundred years ago, as the balloon of empire began to recede, global money and trade flowed through the docks, exchanges and the City of London. A massive, self-replicating financial ecosystem of lawyers, accountants, brokers, bankers, and functionaries, alongside global markets in financial services, insurance, commodities, metals, shipping, trade and gold were supported by institutions like the Bank of England (to ensure its stability), the pound and The Law maintaining London at the centre of global finance.

Look upon my works yet mighty…. and despair.. All things pass.

Years ago I wrote how more people worked in financial services in the City of London than lived in the Financeplatz Europa of Frankfurt. That may still be true – but its irrelevant now that the City is little more than processing than risk taking. The deals and the centre of global financial gravity is moving on from London. It is elsewhere…. it is on my mobile phone, your laptop on the plane, your desktop where ever your office is.

That has profound implications for London. As London’s asset management industry contracts because it can’t compete on a cost basis with larger global rivals, and the banks employ less staff with bloated bonuses, the effects will soon be felt in London’s over-ripe housing market. 1^st year banking associates on £120k per annum will become extinct, begging the question who is going to support the bottom rung of London’s property market? Post Brexit there are fewer and fewer reasons to be based in London.

Since the Global Financial Crisis (which began in 2007, peaked in 2008 with multiple bank bailouts – but lingers today), London has staggered on despite the distortions of QE in terms of insanely low interest rates, massive inflation in financial assets, rising inequality and now a looming global economic recession. While US banks swiftly recovered from the shock of Lehman’s collapse in 2008, UK banks remain diminished by over-regulation. Today, there is not a single UK financial firm competing at the top table of investment banking. Barclays are reeling for their CEO’s dalliance with a sexual predator, and HSBC lost the plot years ago. In contrast even Deutsche Bank, perennially the most troubled bank in Europe, is looking marginally more positive.

The reputation, the relevance, the influence and the relative importance of the City of London is in decline for many reasons.

• It is partly due to the diminished size and scope of the UK economy – in global terms the UK remains the 6^th largest economy (depends how you measure it), but it is of declining relative economic importance; every year the UK’s growth is below that of other nations our share of the global economic pie declines.
• It’s partly due to the diminished size of the UK stock markets. When I was young, the FTSE was the second most important equity index on the planet. Now I don’t bother to follow it, bucketing it behind the French CAC and German DAX. It doesn’t particularly tell me anything.
• UK companies fail to reach a globally significant critical mass – they are bought and sold too young, becoming, like Nvidia, playthings of global funds. There is little nurture of firms though early growth to global dominance. Aside from a few oil majors and miners, tell me about a single significant UK manufacturing company generating positive headlines. (Rolls Royce and JCB don’t count for oh so many reasons.)
• What negative effects has Brexit triggered? How many export markets are now closed, or are simply too difficult in terms of complexity and cost.
• Has Britain’s position as the preferred unsinkable aircraft carrier for overseas firms into Europe become a negative – sucking up UK talents and skills into foreign owned companies? (Good point – I spent most of my financial career working for US firms. When I found myself in UK firms, the opportunities were less, the culture less hungry, and the rewards far less.)

Yet, there is always hope. Any list of the best, most innovative universities is littered with UK institutions. When I visit Heriot-Watt up in Edinburgh, where I’m an honorary Professor, I see innovation, excellence, and inventiveness – and always something that needs more money than the education budget can afford.

The UK may not be able to make the railways work on time (because of flaws in the way they are structured and managed), faces an enormous utility infrastructure rebuild cost (because of privatisation and regulatory failures), and has the most professional armed forces equipped with ancient obsolete weapons, (because of piss-poor procurement and mismanagement), but we remain an inventive and resourceful nation.

We can do better, but to be honest – we really need a national reset, and that looks unlikely to happen anytime soon.

Bill Blain

Market Strategist
Author of the Morning Porridge – www.morningporridge.com