Nout Wellink, chairman of the BCBS, suggests measures to alleviate market turbulence
BASEL & GRONINGEN – Banks should be thinking about changing their compensation structures to improve their risk profile, said Nout Wellink, president of the Netherlands Bank and chairman of the Basel Committee on Banking Supervision (BCBS), in a speech at the University of Groningen in the Netherlands.
Wellink stressed the role of incentivisation as a root cause and solution to the credit crunch. “Misguided incentives are often also at the root of growing imbalances, because of conflicting micro and macro perspectives,” he said. “This is because at the micro level, market participants tend to take the environment in which they operate as given, for instance prices and the behaviour of other market participants. But factors that are considered exogenous at the micro level may become endogenous for the financial system as a whole.”
“Employees who receive massive bonuses when earnings are high but are hardly hit when losses are made, are probably less prudent than would be in the interest of their employer,” he continued. “This not to say that bonus systems are by definition wrong, but they should be designed in such a way that curbs exist on inappropriate behaviour. Perhaps one way to improve this is to ensure that an employee’s time horizon is aligned with that of more general interest, for instance by making bonus payments dependent on broad performance indicators over a longer period.”
More on Regulation
Executives will be liable for banks’ misconduct under Senior Managers Regime
Central bank eyes big data and psychology
Regulators and industry to meet in London on March 2
Regulators have brought in Basel III liquidity measures ahead of peers but the industry is ready
Sign up for Risk.net email alerts
Oxford professor David Vines argues that the carrot is as important as the stick
Sponsored webinar: IBM
Watch highlights of this year's London conference
Operational risk and the challenges of defining and dealing with conduct risk
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.