Controlling And Monitoring A Bankers Bonus Finance Essay

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1. Introduction

Huge bonuses for bankers is believed to be the instrument of reckless risk taking, which at the very least contributed the credit crisis and great recession, if it is not a principal and direct cause. It is widely controversial that whether controlling bankers’ bonus should be a part of a package of macro prudential regulation. This essay advocates that controlling bankers’ bonus should be a part of a package of macro prudential regulation for that paying big bonus to bankers is a collective behavior of banking institution which expands risk and jeopardizes the stability of the banking system. The essay ponders over the reasons that empirical fact proves the positive link between risk taking and pay-off to the bankers, that the bonus system existing in banking industry nowadays is asymmetric as well as an incentive to short term return at the expense of long term profit, retorting two arguments that high bonus in banking industry is determined by market value law as well as that cutting bankers’ bonus would cause outflow of talent in banking industry, and mention that two concerns regarding controlling bankers’ bonus should be addressed.

2. Background

The global economy is looming, struggling to recovery from the aftermath of the financial crisis two years ago. Overindulging risky activities contributing to the severe financial crisis that was experienced for the first time since the Second World War¼Œbankers’ bonus is in the spotlight.

The bonus in banking industry is eye-popping high. According to New York State Comptroller Office, London and the City Prospects, Wall Street Journal estimates and Centre for Economic and Business Research estimates, from 2002 to 2007, the bankers’ bonus in the US surged from 9.8 billion dollars to 33.2 billion dollars. The year of 2008 witnessed a slump of the bankers’ bonus to 18.4 billion dollars due to the financial tsunami. However, it is estimated that the bankers’ bonus bounces back to 27.5 billion US dollars in 2009 in spite that the bank industry still suffers from the tremendous loss. It is a similar case of UK. After decreased drastically from the peak of 2007 at 10.2 billion pounds to 4.0 billion pounds in 2008, the bankers’ bonus in UK boomed to 6.0 billion pounds in 2009 as if the financial crisis has never happened. Examining the individual bank, the Royal bank of Scotland is at the front line. It posted catastrophic losses, the amount of which is as high as 3.6 billion pounds; it was paying 1.7 billion pounds in bonuses. The fact that the bank was bailed out by tax payers all around the country last year makes the figure of bonuses paid to bankers more outrageous.

Several countries have already taken initially to introduce measures to impose curb on bankers’ bonus. Netherland puts a cap on banker’s bonuses, limiting the bonus should never exceed the base payment. UK levies a 50% tax on bankers’ bonus.

Macro prudential regulation is defined (Borio 2009) as: "

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