FSA Attacks Risk Taking Bankers
The Financial Services Authority (FSA) recently attacked City bankers who thrive on big bonuses, warning high payout incentives could lead to too much risk taking.
The days of easy credit for consumers may be over as banks "have become increasingly sophisticated in their use of financial engineering", according to the guardian.co.uk. Bonuses paid to City bankers withstood the pressures resulting from the credit crisis, despite the profit of major investment banks taking the hit.
FSA Chief Executive Hector Sants told BBC Radio 4's Today programme, "There is a risk that the remuneration systems are too short-term and that they do incentivise behaviour which is not helpful in terms of maintaining long-term financial stability." Nearly three quarters of financial firms paid bankers the same amount in bonuses, or more, as they did in 2006, which was a record year. This year alone around £7bn first quarter bonuses will be paid.
Today's economic climate is much different compared to last year. After the sub-prime mortgage market in the U.S. resulted in huge financial losses, firms stopped lending to each other resulting in the collapse of Northern Rock, the first run on a UK bank 150 years.
Huge payouts in a financially conservative environment may not be the way forward. The potential volatility of the money markets, as Northern Rock experienced, has lead to tightened lending conditions and less risk-taking by the banks. Compared to this time last year, the UK is experiencing an economic downturn.
The FSA Chief says, "I don't think markets are ever going to return to the way they were. The idea that at some point they will go back to normal, I think, is a misnomer. The new normal will be different from the way that markets behaved in the past.
"This strategy rebalancing may further affect the availability and price of credit, but from a regulator's point of view that is not necessarily a bad thing."
Consumers are already finding it more difficult to borrow and many may struggle to repay their loans and mortgages this year. As a result, Sants is calling on financial firms to treat their customers fairly.
Published on February 28, 2008
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