Financial Regulatory Forum

COLUMN – So, banker, how much do you get paid?

By Guest Contributor
January 7, 2011

Bank Street, LondonBy Keith Mullin, Editor at Large, International Financing Review; the views expressed are his own

LONDON, Jan 7 (Reuters) – The New Year began as the old one ended, with a flurry of histrionics and hyperbole around the… OK, admittedly salacious… topic of bank bonuses.

The problem is there are now so many official, semi-official and generally interfering bodies and organisations spouting forth sanctimoniously and/or contradictorily about how banks should structure their compensation schemes and how much they should pay their staff that the only inevitable result – mystification – has duly been reached.

Official utterances about bonuses have come from the G20, the IMF, the Basel Committee on Banking Supervision, the Financial Stability Board, the Committee of European Banking Supervisors (now called the European Banking Authority), the European Parliament among others; as well as individual national regulators and supervisors. Their extensive output on the subject has been supplemented by a tidal wave of interpretative comment and analysis from think tanks, consultants, and the like.

Regulators just need to be clear and give bank chiefs a chance to cut through the claptrap and contradictions and figure out how and how much they can pay their bankers for performance.

If only. Alas, the issue of bank compensation looks to be going the same way as the broader discussions about how best to create a seamless and workable framework for global financial market regulation. The knot of haggling and competitive global, regional and in-country bodies is undermining efforts to create a level compensation playing field.

INERTIA

Compensation arbitrage as a competitive tool has always been a feature of investment banking. The lack of consensus between countries around what constitutes a proper governance channel; what proportion of bonuses can be paid in cash; how the vesting period needs to be structured for delayed comp; what clawback mechanisms need to be in place; whether guaranteed bonuses are allowed and under what circumstances; how specific banks need to be in demonstrating that they are not incentivising excessive risk-taking (however that may be defined) seems to be leading to inertia and in some ways keeping vestiges of the old status quo going.

The Basel Committee’s latest pronouncement on the subject: “Pillar 3 disclosure requirements for remuneration” – issued in the dead period between Christmas and the New Year when no-one was around – is a long list of quantitative and qualitative items that banks need to disclose around compensation policy and practice. The required disclosures go far beyond the scope of compensation, even in the holistic new way of viewing the world, into the realm of how banks run and risk-manage their businesses. They’re a step too far.

Basel says the additional requirements will support an effective market discipline and allow market participants to assess the quality of the compensation practices and the quality of support for the firm’s strategy and risk posture. Fine. They’re designed to be sufficiently granular and detailed to allow meaningful assessments by market participants of the banks’ compensation practices, while not requiring disclosure of sensitive or confidential information. Not so sure about that one.

The Basel Committee is requesting feedback by February 25. Here’s some feedback to Basel and to all those who are building towards overly-prescriptive compensation models: re-read the Financial Stability Forum’s April 2009 Principles for Sound Compensation Practices and ask yourself if you’ve not misinterpreted their spirit. The FSB was clear that the principles are intended to reduce incentives towards excessive risk taking but not to prescribe particular designs or levels of individual compensation.

Even then the issue is more about risk-taking that leads to systemic risk than it is about risk-taking per se. At the end of the day, regulators need to create a framework that dissuades banks from engaging in activities and in volumes that might lead to systemic risk but which allows them to get on with their business. Bonuses are an emotive topic and they do need to be managed, but let’s not over-inflate their importance in the grand scheme of creating a financial system with adequate safeguards. (Editing by Joel Dimmock) ((keith.mullin@thomsonreuters.com))

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