FSA chief Hector Sants has come out of the closet and said bonuses should be taken into account when assessing banks’ risk. But we’d like to point out that it wasn’t his idea. Sants seems to have latched onto a notion first aired by Alchemy Partners’ founder Jon Moulton last week.
So how does Jon think the plan Sants has pilfered from him would work?
“I presume you’d need to have some measure of a reasonable level of bonus and an unreasonable level of bonus, based on bonuses as a percentage of salary,” he tells us.
“If the average bonus were 200% of salary that would be considered less desirable than if the average bonus were 100% of salary.”
Sants’ version looks distinctly vague by comparison: he’s threatening to look at “compensation structures that encourage risk-taking”.
More ominous is Sants’ intimation that banks paying bonuses deemed excessively risky will be obliged to increase their capital base.
This won’t go down very well at all, says Moulton: “You’ll have mass departures from i-banks if you say that for every 1% increase in bonuses you’ll need a 1% increase in capital,” he predicts.