The comp question is not one of risk, I think. The issue is what kind of people do you want to attract to banking: entrepreneurs or bureaucrats? Bonuses attract entrepreneurs; salaries attract bureaucrats.
Banking used to be a fairly bureaucratic business, or at least Walter Bagehot thought so. "3-6-3" Take money in at 3%, lend it out at 6%, and hit the links by 3 PM. Traders are not bureaucrats. Central banking is still a bureaucratic business, and has a very muted bonus structure. Bank ops are bureaucratic.
Do you want to trust the payment system to entrepreneurial types? This is the main argument for financial segmentation, and weakened connectivity between the entrepreneurial bits of financial services and the plumbing. Financial regulators don't think at this level, because their economists have taught them not to look beyond their precious capital rules.
Levine was quite good on this development. The PRA explicitly made the point that having a large fraction of banker compensation be discretionary is inherently risk-controlling for banks, because banker compensation is their main expense. The proposition that delaying this compensation will make it harder to game the system seems at least superficially plausible?
Anyway, here is how Levine put it in his summary graf:
"You can see why, after 2008, politicians and regulators wanted banks to take less risk. But discouraging bankers from being risk-takers has some bad consequences. Banks are fundamentally risky: They are leveraged businesses, they borrow short to lend long, there is always some risk of blowing up. Silicon Valley Bank failed this year because it bought too many Treasury bonds; surely it didn’t intend that to be a big risk. If you get rid of all the risk-takers at a bank, then there will be no one left who is good at taking risks, but the bank will still be taking risks. You have to strike the right balance. Maybe the new regime does that: Paying big bonuses attracts risk takers, but paying big deferred bonuses attracts thoughtful, long-term risk-takers."
The comp question is not one of risk, I think. The issue is what kind of people do you want to attract to banking: entrepreneurs or bureaucrats? Bonuses attract entrepreneurs; salaries attract bureaucrats.
Banking used to be a fairly bureaucratic business, or at least Walter Bagehot thought so. "3-6-3" Take money in at 3%, lend it out at 6%, and hit the links by 3 PM. Traders are not bureaucrats. Central banking is still a bureaucratic business, and has a very muted bonus structure. Bank ops are bureaucratic.
Do you want to trust the payment system to entrepreneurial types? This is the main argument for financial segmentation, and weakened connectivity between the entrepreneurial bits of financial services and the plumbing. Financial regulators don't think at this level, because their economists have taught them not to look beyond their precious capital rules.
Levine was quite good on this development. The PRA explicitly made the point that having a large fraction of banker compensation be discretionary is inherently risk-controlling for banks, because banker compensation is their main expense. The proposition that delaying this compensation will make it harder to game the system seems at least superficially plausible?
Anyway, here is how Levine put it in his summary graf:
"You can see why, after 2008, politicians and regulators wanted banks to take less risk. But discouraging bankers from being risk-takers has some bad consequences. Banks are fundamentally risky: They are leveraged businesses, they borrow short to lend long, there is always some risk of blowing up. Silicon Valley Bank failed this year because it bought too many Treasury bonds; surely it didn’t intend that to be a big risk. If you get rid of all the risk-takers at a bank, then there will be no one left who is good at taking risks, but the bank will still be taking risks. You have to strike the right balance. Maybe the new regime does that: Paying big bonuses attracts risk takers, but paying big deferred bonuses attracts thoughtful, long-term risk-takers."
You’ve nailed it here. The big information challenge in most organizations is collation. Who knows what the org knows? Certainly not the org!