05 October 2008
The New World for Banking
On 4th October 2008 a poll by ft.com asked the question, "Will the rescue plan work?". This was a reference to the $700bn rescue plan for the financial services industry finally approved by the US Congress earlier that day. I posted in the following comment, which can be viewed at
http://www.ft.com/cms/6c2bf1ce-91b7-11da-bab9-0000779e2340.html?a=tpc&s=646099322&f=851094803&m=9531017771&r=9531017771 .
The $700bn rescue plan can, at best, only help in the short term. Unfortunately the underlying long term attitudes which caused the credit crunch are still very firmly in place.
We should certainly hope that the $700bn might last long enough to allow development of new and tighter regulation for banks that is internationally agreed. Sadly it is hard to find solid grounds for this hope, because the regulation that banks really need is likely to work against the instincts and vested interests of most of the people involved in the discussions.
Banking need to be much, much simpler so that financial markets are more readily understandable. Complex derivatives proved to be much more effective at hiding risk that at managing it efficiently. Banks need to be much smaller so that failures are more manageable. Banks need to be less leveraged so they are safer and have more of a utility feel. The capital banks have available for speculation must be linked to market making obligations. Speculative capital should be strictly limited so that huge movements in short term capital cannot cause market lurches.
The incentives that drive banking behaviours need far more attention. The incentives that arise from holding a "long" equity position are much more constructive to the economy as a whole that the incentives which arise from holding a "short" position. The incentives that arise from pay need careful consideration. Top bankers should not be eligible for annual bonuses; all incentives should be on a long term basis. The top mangers in a bank must all have common incentives so that they work together, share information and form a common mind on the banks position and the state of the market. Above all the pay of top bankers must be much lower so that shareholders can feel confident that the top bankers are working for the shareholders' benefit not their own benefit. Very high pay increases the likelihood of ruthless and self-seeking characters at the top of the organisation; if you pay gold you get pirates!
In summary banking needs to become much, much more boring! Banking careers should appeal to steady and consistent people. Just like top athletes, top bankers should be subjected to regular drugs tests. The supercharged performance currently expected is not human and its puts inhuman pressures on other parts of the system.
Unfortunately we are still a very long way from a safe and boring banking system. And in the meantime what are the whiz-kids doing? Well I expect that the big prizes right now are for finding the best schemes to persuade government to take over and pay too much for the very worst assets. All this overcharged pursuit of money has killed many of our financial institutions. Are we going to allow it to kill our public finances?
http://www.ft.com/cms/6c2bf1ce-91b7-11da-bab9-0000779e2340.html?a=tpc&s=646099322&f=851094803&m=9531017771&r=9531017771 .
The $700bn rescue plan can, at best, only help in the short term. Unfortunately the underlying long term attitudes which caused the credit crunch are still very firmly in place.
We should certainly hope that the $700bn might last long enough to allow development of new and tighter regulation for banks that is internationally agreed. Sadly it is hard to find solid grounds for this hope, because the regulation that banks really need is likely to work against the instincts and vested interests of most of the people involved in the discussions.
Banking need to be much, much simpler so that financial markets are more readily understandable. Complex derivatives proved to be much more effective at hiding risk that at managing it efficiently. Banks need to be much smaller so that failures are more manageable. Banks need to be less leveraged so they are safer and have more of a utility feel. The capital banks have available for speculation must be linked to market making obligations. Speculative capital should be strictly limited so that huge movements in short term capital cannot cause market lurches.
The incentives that drive banking behaviours need far more attention. The incentives that arise from holding a "long" equity position are much more constructive to the economy as a whole that the incentives which arise from holding a "short" position. The incentives that arise from pay need careful consideration. Top bankers should not be eligible for annual bonuses; all incentives should be on a long term basis. The top mangers in a bank must all have common incentives so that they work together, share information and form a common mind on the banks position and the state of the market. Above all the pay of top bankers must be much lower so that shareholders can feel confident that the top bankers are working for the shareholders' benefit not their own benefit. Very high pay increases the likelihood of ruthless and self-seeking characters at the top of the organisation; if you pay gold you get pirates!
In summary banking needs to become much, much more boring! Banking careers should appeal to steady and consistent people. Just like top athletes, top bankers should be subjected to regular drugs tests. The supercharged performance currently expected is not human and its puts inhuman pressures on other parts of the system.
Unfortunately we are still a very long way from a safe and boring banking system. And in the meantime what are the whiz-kids doing? Well I expect that the big prizes right now are for finding the best schemes to persuade government to take over and pay too much for the very worst assets. All this overcharged pursuit of money has killed many of our financial institutions. Are we going to allow it to kill our public finances?
Labels: banking, incentives, regulation
