An Absence of Markets: Banking Edition

OK, I don’t mean that title literally, but if you’ll bear with me you’ll see what I mean. I got tickled pink – in a I-can’t-believe-this sort of way – reading this in the paper today:

Aid for banks to address staff pinching
By SHARIDAN M. ALI

They will get 25% from penalty paid by poacher bank to Financial Staff Training Fund

PETALING JAYA: Banks that suffered from staff poaching in the industry will be better compensated starting this year so that they can reinvest in training.

The compensation will be in the form of 25% allocation from the penalty paid by the poacher bank to Financial Staff Training Fund set up to address staff pinching.

Previously, the whole portion of the penalty, which amounts to six months new salary of the employee being pinched, goes to the fund.

However, the 25% allocation for banks that were pinched will be the form of credit that can be used to train staff at Institute of Bankers Malaysia (IBBM) and Financial Sector Talent Enrichment Programme (FSTEP).

It was reported that staff pinching in the country’s banking industry might become rampant with the entry of more foreign banks.

Reading the text, you'll note that there's nothing from the perspective of the workers involved. From my point of view, who gets the allocation from the penalty is beside the point – why is there a penalty in the first place? The idea that banks have to be compensated from the loss of trained and experienced staff doesn’t meet the smell test – practically no other industry in Malaysia does the same.

More important from a labour market point of view, the 6-month pay penalty is effectively a tax on employment, and suppresses wage increases. To see how that works, lets examine the counterfactual – what would the market for bank staff be like in the absence of the poaching penalty?

The reason why banks poach each others’ staff is that as a service industry, human capital is paramount (well, the money they handle matters too, but you get what I mean). If demand is greater than supply, as implied by the comments in article, than the price has to be bid up to equilibriate the two – in other words, wages must rise. But that doesn’t quite happen with the poaching penalty, because it acts as an additional cost to recruitment – sand in the gears of the market so to speak. Since the cost of employment is higher, only the really good performers are actually poached, while the vast majority stay put, because the value of their marginal product (skills, knowledge and experience as it relates to banking output) to the poaching institution doesn’t justify the expense. But even for high performers, the additional cost of the poaching penalty serves as a brake on wage increments, even as banks find creative ways to get around the ruling (temporary “parking” in non-bank affiliates or subsidiaries is pretty common practice).

So the poaching penalty makes a sort of sense for banks as employers, because labour mobility is effectively lower and leverage for wage demands is also lower. But it obviously makes little sense for the employees and I’m wondering why NUBE and ABOM aren’t agitating for its removal.

I was changing money for duit raya today, and the front-line staff who served me (I had to run around three different banks to get all the denominations right) were unfailingly courteous and competent. Considering the trust that’s placed on them every day, with thousands of Ringgit in cash flowing through their hands, and the fact you almost never hear of fraud at the counter level (as opposed to the managerial level) – I think they’re criminally underpaid.

And part of that reason is a dysfunctional labour market due to an old rule that probably made a sort of sense decades ago, but is just an impediment now. All the major banks have extensive training facilities and programs plus the support of IBBM, so don’t tell me they can’t build competences in their own organisations.

A couple of last thoughts – because of wage suppression effect of the poaching penalty, you should also factor in the effect on labour supply. If wages don’t appear attractive and scope for wage increases is low, then the industry will attract less recruits, both in terms of quantity and quality. I worked in the banking sector for half my career – trust me, pay and bonuses weren’t exactly thrilling.

Secondly, with the drive towards high-income status under the NEM, financial services will be an important contributor. But with a labour market subject to administrative frictions that reduce labour mobility and wage pressure, it’s hard to see how income might be more equitably distributed between capital and labour on the one hand, and high income and low income earners on the other.