Barclays' Bonuses Leave Nasty Taste for Small Businesses

Barclays Bank's proposed bonuses to high performing staff illustrates the dilemmas banks face -- reward high-flyers or risk them skipping off to rivals, increase lending and risk being accused of abandoning fiscal prudence.

Barclays has tried to offset any umbrage caused by the doubling of its yearly profits for 2009 to £11.6bn by announcing the chairman, president and CEO will not take their annual bonuses and that it lent £35bn to individuals and businesses last year -- three times more than it promised at the beginning of the tax year.

That said, it is paying 22,000 investment bankers £2.7bn in short-term and long-term bonuses -- about £100,000 extra in their pay packet. The announcement looks selfish against the background of a report out by the Institute of Directors which found 60 per cent of small businesses have been refused the loans they need to keep their heads above water and many have been forced to rely on unsecured credit, such as credit cards.

Undoubtedly there will be a real fear that if investment bankers don't get the remuneration they feel they deserve, they will defect, especially after the news that two senior investment bankers at majority state-owned RBS have done just that, a week before the bank announces its bonus package. Barclays glowing figures are entirely down to its investment arm, with the retail division halving its yearly profits. Is it not good business sense then to invest in the booming part of the business and cut back on the poorly performing part?

It's understandable that banks are more careful in lending to small businesses, which carry a higher risk of defaulting on debt. The banks were branded the irresponsible catalysts of the credit crunch and are much more risk averse in all areas of business than they were two years ago.

However, Barclays and all the other UK big banks have a duty to the economy now. Barclays didn't take any of the government hand-out, but it benefitted from the banking industry as a whole being propped up by the public purse. Business customers are also tax-payers and so deserve to benefit from banks' stellar profits.

There are lots of good business reasons too for banks to release more funds to small businesses. Foremost, it wasn't lending to small businesses that caused the credit crunch, so there is little good reason that they should be penalised any more than they were before the economic downturn. As a group, they are a significant customer group for the banks. This customer group may find their custom is more welcome elsewhere if UK banks restrict credit for the long-term.

More than this though, although many small businesses fall by the wayside, some eventually become big businesses that are prudent investments. To throttle small businesses now limits the potential for profits for banks in the future.