Board members should pay for failed banks, says think tank

A free market think tank is arguing for bank bosses to have direct financial liability for bank failures.

In its report, Market-based bank regulation, published today, the Adam Smith Institute argues that bailouts have encouraged risky behaviour while more “blunt” regulation will not prevent future banking crises.

It suggests the only way to tackle problems of excessive risk-taking in banking is to make top executives liable for losses and failure through their bonuses and shareholdings.

The report says banks should be able to issue special shares to board members that can only be cashed after five years. If the bank fails then the directors would be held responsible for the value of the shares on the day they were received.

It also advocates allowing banks to have total clawback powers over any bonuses within 10 years if problems arise.

It says any rules should only be targeted at executives who have the power and authority to make decisions which have a material impact on the bank’s risk profile. The ASI argues bosses would be incentivised to build more rigorous managerial oversight of junior staff.

Author of the report Mikko Arevuo says: “An overly complex regulatory framework may result in the creation of risks that no one had predicted in advance, as banks try to find ways around the new regulations.

“I believe that effective regulation should focus on incentivising managers to behave in the interest of their firms’ key stakeholders, rather than focus on the institution level capital adequacy-based frameworks.”

The EU capital requirements directive IV is proposing to strip bankers of their bonuses if the bank dips below the required capital buffer threshold.