–BOE Director Haldane Says Banks Should Focus On Returns on Assets
LONDON (MNI) – Banks should end their culture of linking
remuneration to equity and look instead at returns on their total
assets, Bank of England Executive Director for Financial Stability
Andrew Haldane says.
Haldane highlights the vast salaries paid to bank executives, and
notes that when the financial crisis hit it was society as a whole that
had to pick up the tab, showing bank gains were privatized but losses
socialised. He identifies the link between pay and bank equity prices as
one factor that distorted incentives for executives.
In 1989, the Chief Executive Officers of the seven largest banks in
the US earned on average around 100 times median US household income. By
2007, at the height of the financial boom, their earnings were over 500
times median US household income.
But pay growth cannot be justified in terms of long term return on
equity – in real terms global bank equity prices are on average little
different than in the 1990s. Haldane says banks should switch from
linking pay to return on equity to linking it to return on assets –
which would take into account banks’ whole balance sheets.
“It would be a relatively small step for banks to switch from ROE
to ROA targets in their capital planning and compensation. Yet the
effects on risk-taking and remuneration could be large,” he says in the
annual Wincott Memorial lecture here.
Haldane says had the CEOs of the seven largest US banks linked
remuneration to ROA their pay by 2007 would have been just 68 times
median household income.
Haldane is also a member of the BOE’s newly formed Financial Policy
Committee – which is steering the central bank’s policy to bolster
financial stability.
–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$B$$$,M$$BE$]
