Saturday, November 28, 2009

Banking bonuses can't be left to market

Both Martin Wolf of the FT and the Economist have joined the chorus for containing bank bonuses in today's conditions. Wolf wants a 'windfall tax'. The Economist asks that a 'funding premium' be recovered from banks before bonsuses are calculated- this would compensate the tax payer for government support to banks.

I think the problem goes beyond the present crisis. We need to view executive pay in banks as a potential source of systemic risk. I cannot see the market responding suitably to this problem. We will soon require regulators to approve top management pay in banks. This is not as novel as it sounds- the RBI has been doing it for long. The challenge for regulators is to put in place norms for executive pay at banks and apply these to the entire sector. We need regulators in different countries to agree on this as otherwise we are bound to see 'regulatory arbitrage'.

More on this in my ET column, Reining in rogue bonuses


Shuvabrata said...

What i fail to understand is why only banking bonuses are under attack? All top executive pay needs to be controlled in that sense. And the whole world needs to turn into class-less Soviet then.
The RBI has been doing it for years and that's why we don't have a single Indian Bank in the global top 20 whereas in most other industries we already have.
In the name of stabilizing this is an attempt to curb the free functioning of market based economy by the bureaucracy.

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