COMMENT
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By Neil Record
Published: January 6 2010 19:54 | Last updated: January 6 2010 19:54
There are as many explanations for the causes of the credit crunch as there are economists, but some themes predominate: excessive leverage; inadequate capital; over-complex financial instruments; an asset bubble; and (pretty universally) the asymmetric incentives that arose from bankers' bonus arrangements. Bankers were paid when the risks they took paid off, but were not penalised when their bets went sour. Since it can take years to be certain that bank risks are profits or losses, it proved too easy for them to take the cash on short-term gains but to have no responsibility for the consequences of their actions years later.
There has been a proliferation of plans to fix this structural weakness of the banking system. But politicians and regulators have overlooked a really simple solution. Why not design a limited-liability model, where bankers become personally liable for the cumulative amount of their bonuses?
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