Discuss the Role That Banker and Banker Compensation Played in the Credit Crisis and Some of the Reforms to Banker Bonuses Which Have Been Suggested and Implemented and Your Views as to Their Effectiveness?
Discuss the role that banker and banker compensation played in the credit crisis and some of the reforms to banker bonuses which have been suggested and implemented and your views as to their effectiveness?
The bankers were not the main cause of the crisis but they played an important role in the crisis. It was the caused of the banks run causing them to have liquidty problems an example of a famous bank run would be the northern rock incident.It was a change in culture of the bankers making them take excess risks without considering the consequences of their actions because they were not penalized for their actions instead they were being rewarded.In the past the traditional sterotype of the banker based on commercial banking would most likely elicit such descriptions as helpful,wise,conservative ,not pushy, concerned with the bank customer’s best interests.However due to the growth of investment banking over the years this image of the banker has changed dramatically. The bankers are commonly seen as less concervative , more concerned about the bank’s and their own bottom line profit with the interest of customers subordinated below the bank’s and banker’s own self –interest.Bankers were increasingly paid through short term cash bonuses based on volume and on marked to market profits rather than on the long – term profitability of their”bets” Thus they had no incentive to discount for the liquidity risk of abs (Asset backed securities)/ Securitization.Nor was there an incentive to discount for the “maturity mismatch” inherent in structured investment vehicles which funded long term assets through short term debt that had to be rollerd over frequently and the managers of the bankers did not access the reason why the bankers were making such huge profits but gave them incentive of bank bonuses if they were able to make greater returns.Therefore the regulatory arbitrage became the primary business of the financial sector because of the short term profits it was
The bankers were not the main cause of the crisis but they played an important role in the crisis. It was the caused of the banks run causing them to have liquidty problems an example of a famous bank run would be the northern rock incident.It was a change in culture of the bankers making them take excess risks without considering the consequences of their actions because they were not penalized for their actions instead they were being rewarded.In the past the traditional sterotype of the banker based on commercial banking would most likely elicit such descriptions as helpful,wise,conservative ,not pushy, concerned with the bank customer’s best interests.However due to the growth of investment banking over the years this image of the banker has changed dramatically. The bankers are commonly seen as less concervative , more concerned about the bank’s and their own bottom line profit with the interest of customers subordinated below the bank’s and banker’s own self –interest.Bankers were increasingly paid through short term cash bonuses based on volume and on marked to market profits rather than on the long – term profitability of their”bets” Thus they had no incentive to discount for the liquidity risk of abs (Asset backed securities)/ Securitization.Nor was there an incentive to discount for the “maturity mismatch” inherent in structured investment vehicles which funded long term assets through short term debt that had to be rollerd over frequently and the managers of the bankers did not access the reason why the bankers were making such huge profits but gave them incentive of bank bonuses if they were able to make greater returns.Therefore the regulatory arbitrage became the primary business of the financial sector because of the short term profits it was