Promoting Bank Stability Through Compensation Reform: Lessons from Iceland

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JournalIcelandic Review of Politics and Administration
DatePublished - 17 Dec 2015
Issue number2
Volume11
Original languageEnglish

Abstract

This article argues that the program of compensation reform at financial institutions ? despite recent wide-ranging changes ? remains incomplete. A considerable body of theoretical and empirical research has been developed which, for the most part, suggests that compensation incentives embedded in compensation contracts at banks encouraged risk-taking behaviour which contributed to the Global Financial Crisis. Extensive reforms to compensation rules at financial institutions have been implemented across the globe, including increased use of deferral, mandatory capping of bonuses and the introduction of claw-back powers. Relying on observations on the failures of Icelandic and UK banks, and legal and economic analyses of compensation reforms in each jurisdiction, this paper argues that some elements of the Icelandic and UK reform programs ought to be transposed to the EU level. Arguably, these recommendations will help improve the resilience of the European banking system and contribute to greater financial stability.

Bibliographical note

copyright 2015 The Author(s). This work is licensed under a Creative Commons Attribution 3.0 License (https://creativecommons.org/licenses/by/3.0/).

    Research areas

  • Bankers pay, compensation, policy making, financial regulation, prudential regulation, financial crisis, special purpose vehicles, total-returnswaps

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