In relation to the causes of the credit crunch, Mr Sants disclosed that the FSA is unhappy at the way banks rewarded their star bankers during the boom years.
He says that there was an incentive on these bankers to take excessive risks with their firms' capital. That foolish risk taking has come home to roost in the form of massive losses on investments linked to US subprime lending.
Mr Sants said that the FSA would find a way to penalise any banks which continue to incentivise staff to take dangerous risks. He said there would be "consequences" for banks that pay employees too much for doing imprudent deals.
Saturday, 9 August 2008
Bank bonus culture part of the problem
Say FSA chief Hector Sants in his interview with Robert Peston. High pay isn't just a question of fairness, we also need to think about (perverse) incentive effects. When you combine huge incentives with overconfidence it's not surprising that big risks get taken.