Bank of England governor slams city bonuses

Mervyn King lays the blame for the credit crunch on greedy traders and short-term compensation schemes

LONDON – Mervyn King, governor of the Bank of England, has criticised excessive short-term city bonuses, saying they contributed to the current market turmoil. The high bonus regimes favoured by many investment banks fostered excessive risk taking, said King to the Treasury Select Committee on April 29. He warned that the £50 billion liquidity injection announced by the central bank should not be seen as an opportunity to continue paying multimillion-pound bonuses to executives who gambled with other people’s money.

“Banks have come to realise in the recent crisis that they are paying the price for having designed compensation packages that provide incentives that are not, in the long run, in the interests of the banks themselves, and I would like to think that would change,” he told MPs. He also voiced his disgust at the large salaries offered by banks to attract bright, young graduates, which blinkered young people into considering City banking jobs above almost any other types of career.

The disconnect between the multibillion-dollar subprime writedowns by leading investment banks and the continued payment of bonuses to the traders who sold the now-defunct collateralised debt obligations has been flagged by regulators as an area of concern. The Institute of International Finance, a global association of banks, identified in an interim report by its special committee on market best practices that there needs to be a change in this area. But this change needs to come from industry, not from the regulators. Look out for more on this issue in the May and June issues of OpRisk & Compliance magazine.