Banks are struggling to gauge whether staff are taking excessive risks that should lead to bonus curbs set out in a new wave of international rules, global regulators said.
Lenders face “practical implementation challenges” including measuring “poor behavior” that merit bonus cuts or clawbacks, the Financial Stability Board said in a report on its website today. Banks also have divergent views “over the legal enforceability of clawbacks,” the FSB said.
Regulators have sought to rein in banker pay as part of their response to the financial crisis unleashed by the collapse of Lehman Brothers Holdings Inc.
The FSB rules, published in 2009, seek to deter banks from offering bonuses that encourage staff to take excessive risks....Regular readers know that there is one action that the global financial regulators could and should take that would limit banker pay and bonuses: require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
With this information, market participants could exert discipline that would curb excessive risk taking and other forms of poor behavior, like manipulating benchmark interest rates, that bankers engage in to generate large bonuses.
With this information, the earnings generated by banks would begin to resemble what one would expect of utilities that are there to serve the payment and credit needs of the real economy.
The issue of banker pay is another example where the combination of transparency and market discipline results in a far better outcome for the global financial system than the alternative combination of complex rules and regulatory oversight.