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Board members should pay for failed banks, says think tank

A free market think tank is arguing for bank bosses to have direct financial liability for bank failures.

In its report, Market-based bank regulation, published today, the Adam Smith Institute argues that bailouts have encouraged risky behaviour while more “blunt” regulation will not prevent future banking crises.

It suggests the only way to tackle problems of excessive risk-taking in banking is to make top executives liable for losses and failure through their bonuses and shareholdings.

The report says banks should be able to issue special shares to board members that can only be cashed after five years. If the bank fails then the directors would be held responsible for the value of the shares on the day they were received.

It also advocates allowing banks to have total clawback powers over any bonuses within 10 years if problems arise.

It says any rules should only be targeted at executives who have the power and authority to make decisions which have a material impact on the bank’s risk profile. The ASI argues bosses would be incentivised to build more rigorous managerial oversight of junior staff.

Author of the report Mikko Arevuo says: “An overly complex regulatory framework may result in the creation of risks that no one had predicted in advance, as banks try to find ways around the new regulations.

“I believe that effective regulation should focus on incentivising managers to behave in the interest of their firms’ key stakeholders, rather than focus on the institution level capital adequacy-based frameworks.”

The EU capital requirements directive IV is proposing to strip bankers of their bonuses if the bank dips below the required capital buffer threshold.


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. To coin a 1970’s football phrase (for those of us who are old enough to remember the 70’s) “Nice one Cyrill!!!!” That would be a winner in everyone’s books except the executives involved but it does not go far enough. Their personal assets should also come into it in the same way advisers have to if things go pear shaped. It is a great, great start though. I only hope it is passed by the powers that be. Not sure it will be though as the banks will say that this is too big a burden and the so called top talent will go away from the UK. My reaction would be to let them go. If we end up with someone who is only just second best but willing to do what it takes to keep the banks on the straight and narrow. Lets face it the so called talent are the very ones who got us into this mess in the first place. Fred the Shred Bob Diamond et all. I say lets get behind this and give whatever support we can to it.

  2. Sensible suggestion but let’s not forget how much corruption and fraud has been involved in the destruction of our economy by bankers. The ultimate deterrent remains to be prosecuting those bankers who have, in any way, been complicit in criminal actions – including attempting to pervert the course of justice via ‘cover up’ of major fraud.

    Such a scenario would clean out the rot and get the financial sector back on the right track. Anything less can only result in more of the same unethical behaviour because bankers believe they are above the law – which is what successive Governments have encouraged them to think.

  3. lets get real. competence is key not punishment. We want well run, moral banks that understand that they must take appropriate risks. If personal assets are on the line what chance of competing against banks in other countries.

    I do have some sympathy with the view that investment banks were better when partnerships

  4. I would like to make a comment or two, as the author of the Adam Smith Institute policy paper. I think that the central thread of my paper was correctly reported by MoneyMarketing, unlike some other national media outlets. However, I would like to emphasise that the proposals made in the paper are not designed to punish, but to incentivise “good” decision-making. Many of us are familiar to this type of thinking which has been made popular by books such as the ‘The Nudge” and serious academic work on behavioural economics by the Nobel Laureate Professor Daniel Kahneman. I do not, for a minute, argue that my proposals are to punish bankers. Quite the contrary; I fully support just, or even unlimited, rewards for good decisions as long as they deliver lasting shareholder value. What I am arguing is that regulation should focus on human behaviour. By making decision-makers personally liable for their actions changes the rules of the game away from a tacit reliance on lenders of last resort, the source of moral hazard.

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