How Can We Hold Bankers Accountable?

Agenda-Setting Financial Insight.
Oct. 3 2012 9:39 AM

How Can We Hold Bankers Accountable? 

153234436
EU internal market and services commissioner Michel Barnier (R) and the Governor of the Bank of Finland, Erkki Liikanen (L), give a press conference on October 2, 2012 at EU headquarters in Brussels on reforming Europe's banks to prevent any repeat of the global financial crisis.

Photo by GEORGES GOBET/AFP/GettyImages

Bankers should eat their own stew at bonus time. The European Union’s Liikanen review says managers should receive part of their compensation in the form of their own banks’ “bail-in” bonds. Since such debt would plummet if the bank needed a rescue, it would make bosses more alive to the risks their institutions are running.

Bail-in bonds are an important idea in their own right for helping prevent and manage banking crises. Buyers of this subordinated debt would know in advance that they would have to take a hit if the bank ran into trouble. The bondholders would have an incentive to police the issuers to make sure they didn’t take excessive risks. If they still did, the banks would have bigger buffers to absorb the shock - reducing the chance that taxpayers might have to ride to their rescue.

Advertisement

Requiring bank bosses to take some of their pay in this type of instrument would further sharpen the incentive. Managers wouldn’t just be less tempted to repeat the high-risk strategies of the credit bubble, such as mega-acquisitions or leveraging themselves to the eyeballs; they would also be more inclined to police intensively the behaviour of their underlings, who have sometimes caused havoc with rogue trading schemes.

Bail-in debt has different incentive properties from shares. Equity can soar in value, as well as plummet. Managers stuffed with shares can therefore try to shoot the lights out, without worrying too much about the downside.

Some argue that paying bankers with bail-in bonds could make them too risk-averse - and so, for example, refuse to lend in a downturn. But nobody is suggesting that financiers should be paid solely in such debt. A balanced diet would include equity as well as bail-in debt.

Erkki Liikanen, the Bank of Finland governor, isn’t the first person to suggest such a scheme. Lloyds and RBS both paid their bankers in subordinated debt in 2009. Some other central bankers and pundits have also advocated something similar. But Liikanen’s review has now put the idea firmly on the table for the European Union. Governments should run with it.

Read more at Reuters Breakingviews.

TODAY IN SLATE

Medical Examiner

Here’s Where We Stand With Ebola

Even experienced international disaster responders are shocked at how bad it’s gotten.

The U.S. Airstrikes on ISIS in Syria Will Probably Benefit America’s Other Enemies

Divestment Is Fine but Mostly Symbolic. There’s a Better Way for Universities to Fight Climate Change.

It’s Not Easy for Me, but I Stand With Emma Watson on Women’s Rights

It Is Very Stupid to Compare Hope Solo to Ray Rice

Building a Better Workplace

In Defense of HR

Startups and small businesses shouldn’t skip over a human resources department.

Why Are Lighter-Skinned Latinos and Asians More Likely to Vote Republican?

How Ted Cruz and Scott Brown Misunderstand What It Means to Be an American Citizen

  News & Politics
The World
Sept. 23 2014 10:55 AM This Isn’t the Syria Intervention Anyone Wanted
  Business
Business Insider
Sept. 23 2014 10:03 AM Watch Steve Jobs Tell Michael Dell, "We're Coming After You"
  Life
The Vault
Sept. 23 2014 10:24 AM How Bad Are Your Drinking Habits? An 18th-Century Temperance Thermometer Has the Verdict.
  Double X
The XX Factor
Sept. 23 2014 11:13 AM Why Is This Mother in Prison for Helping Her Daughter Get an Abortion?
  Slate Plus
Slate Plus
Sept. 22 2014 1:52 PM Tell Us What You Think About Slate Plus Help us improve our new membership program.
  Arts
Behold
Sept. 23 2014 11:30 AM A Rope Mistress, the Rubber Master, Sadomasochist Sisters: Portraits in Kink
  Technology
Future Tense
Sept. 23 2014 10:51 AM Is Apple Picking a Fight With the U.S. Government? Not exactly.
  Health & Science
Bad Astronomy
Sept. 23 2014 11:00 AM Google CEO: Climate Change Deniers Are “Just Literally Lying”
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.