BOE’s Haldane Wants More Debt in Bank Pay to Reduce Risk Taking

Andrew Haldane, Bank of England executive director for financial stability, said the structure of bank pay still needs to change to include credit instruments and minimize risks associated with some equity packages.

“Equity can give strange incentives to management” when a firm is “at death’s door,” Haldane said at an event yesterday arranged by the Federal Reserve Bank of Atlanta in Stone Mountain, Georgia. “In the crisis, many big firms gambled for their resurrection when, if you look at how top management was remunerated, it was heavily in equity.”

Haldane has already called for changes to bank pay to reduce risks to the financial system, and said in January that bonuses should be deferred for as long as 10 years to encourage “prudence.” He sits on the BOE’s Financial Policy Committee, which monitors risks to the financial system.

So-called bail-in bonds, contingent convertible securities and subordinated debt can counter the dynamic created by big equity components in the pay of top management, according to Haldane. “More can and should be done to have those sorts of debt form a larger part of compensation structures,” he said.

“CoCos if they are triggered are dilutive” and may provide an early incentive to management to have a “remedial plan before they are triggered,” Haldane said. Still, he said that he “wouldn’t exaggerate” the incentive.

Complex Rules

His remarks on pay followed comments on the structure of banking regulation, and how these can undermine financial stability. The current arrangement “has encouraged gaming,” he said at the conference.

Financial regulations are too complex and a “radical pruning” is needed to prevent banks and other institutions from finding ways around them, he said. “We have created a system with Byzantine levels of complexity. It’s near impossible to create a level playing field.”

He proposed three rules: a leverage ratio “set at levels north, possibly well north, of those prescribed in international regulation,” a restructuring rule that “compels you to organize your business in such a way” that enables it to be wound down simply, “and thirdly a resolution rule which effects the restructuring of your business” if needed.

“Have those rules and in return for that we back off,” he said, referring to regulators. “We won’t plant 50 bank examiners in your shop. We will leave you to run your own business.”