Wednesday, March 16, 2011

FDIC Proposes Rule To Pay Bankers More

FDIC announced today that a proposed rule clarifying the "Orderly Liquidation Authority" would allow the FDIC to claw back compensation from senior managers and directors found substantially responsible for the failure of a bank.

What's the problem?  In an attempt to bring greater responsibility to bank managers, regulators actually propose increasing their personal risk.  (That's what I'd call taking away compensation after the certainly aren't reducing their risk!)  So, by increasing executive risk, executives will respond by demanding higher expected compensation.

[If the individuals in question didn't respond this way, then, by definition, they are risk seeking, rather than risk averse.  We most definitely do not want to encourage risk seeking people to engage in bank management!!]


  1. So, I take it you object to medical doctors being sued because their negligence caused untimely deaths?

  2. @Anonymous:

    Absolutely not! I would, however, say that the potential to sue doctors means they are paid more, on the margin, because of malpractice risk.

    The more interesting issue, however, is that doctors have may more draws off the distribution to identify poor performance. If I'm a cardiac surgeon, and I perform 100 procedures a year, an outside observer (like a jury!) has some hope of determining bad luck versus no skill versus gross negligence. Therefore, if I am a good surgeon, and I know it, and I have some degree of confidence in the legal system, then I'm not carrying too much downside risk that I cannot control.

    A bank exec, as we've seen, could be completely incompetent from 2000 to 2007, and made the decision to quit in 2007, living his life out on the beach, versus a (potentially) brilliant bank exec who took over for the incompetent one at the end of 2007, who will look to anyone like a fool because we don't have enough information about his skill.