Monday, March 4, 2013

Bankers prefer complex regulations governing their pay over providing transparency

Do you think that bankers would rather provide ultra transparency and disclose their current exposure details or try to get around complex regulations on bank pay?

Trick question.

Of course the bankers prefer complex regulations as they have an ability to influence how the regulations are drawn up so that their earnings are not interrupted.

The Guardian provided an example of the bankers' ability to influence how the regulations are drawn up.  It reports that
The Chancellor, George Osborne, goes to Brussels on Tuesday in what looks like a forlorn attempt to prevent the European Union from imposing swingeing curbs on bankers' bonuses in the City.
The bankers in London say jump and the Chancellor says how high.

It makes for great political theatre, but will have no impact on the bankers.

Regular readers know that the bankers won when it comes to their pay when they got the policymakers to focus on complex regulations to solve the problem.

The focus on complex regulations to solve the problem meant that more effective solutions were not considered.  Specifically, there was no consideration given to making the banks provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With ultra transparency, banker pay would dramatically decrease.

There are several reasons for this including

  • The cost of funds to each bank would reflect the risks it took and therefore banks would lose the subsidy provided by the combination of financial regulators' information monopoly and their statements about the level of risk at each bank.
  • Market participants could trade against proprietary bets in such a way as to minimize a bank's upside from taking a proprietary bet while maximizing its downside.

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