Economics

Reshaping risk-taking incentives

The evolution of banking as I have described it has satisfied the immediate demands of shareholders and managers, but has short-changed everyone else. There is a compelling case for policy intervention. The best proposals for reform are those which aim to reshape risk-taking incentives on a durable basis.

Wise words from Bank of England’s Executive Director responsible for Financial Stability, Andy Haldane.

I commend Mr Haldane’s excellent essay to Cobden Centre readers.  It is true that he fails to emphasise the role of central banks in assisting this malaise:

  1. the steady, artificial reduction of interest rates, and
  2. when rates had no further to fall, the printing money via QE.

Mr Haldane’s omission masks the role of central banks in propping up asset values.  This in turn has led investors and ratings agencies to conclude that the riskiness of many asset classes has been more benign than free markets would have exposed.  And this concealment of true risk has then driven the increase in bank capital leverage from 10 to 30 times, which results in cataclysmic collapse.

Whilst this omission is regrettable, let’s cut Mr Haldane some slack.  He is a senior Bank of England official who has written a damning indictment of banking excess, perverse incentives, and a passionate call for radical reform which could have come straight from the pages of “Alchemists of Loss” co-authored by his university tutor, Professor Kevin Dowd.

And let us hope that Mr Haldane will embrace the specific proposals to be laid before Parliament February 29th by Steve Baker MP which in my opinion represent the very “reshaping of risk-taking incentives” which Mr Haldane seeks.  Steve Baker will present a Bill that will end this nonsense by restoring unlimited personal liability for main board directors of banks.

2 comments to Reshaping risk-taking incentives

  • I’m fairly sure there is also a recently published article by Andrew Haldane in which he says that the too big to fail subsidy that banks get is larger than bank profits (if he does not make that point in the article linked to above – and I don’t think he does.)

    If that point about the too big to fail subsidy being larger than bank profits is correct, then the bank industry is largely a glorified three card trick.

    I’ve mislaid the URL of the article, but I’ll put it here in a comment if I find it.

  • Found it: See 3rd paragraph under the heading “Implicit subsidies” here:
    http://www.voxeu.org/index.php?q=node/7314