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The Economists' Voice 2.0The Financial Crisis, Health Care Reform, and More$
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Joseph Stiglitz and Aaron Edlin

Print publication date: 2014

Print ISBN-13: 9780231160155

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231160155.001.0001

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Should Banker Pay Be Regulated?

Should Banker Pay Be Regulated?

(p.95) Chapter 12 Should Banker Pay Be Regulated?
The Economists' Voice 2.0

Steven N. Kaplan

Columbia University Press

In the wake of the recent banking crisis, world leaders are looking for ways to see that this never happens again. G-20 leaders, the Obama administration, and, apparently, the Federal Reserve have focused on pay practices at financial firms as being a key cause of the recent disaster and have proposed restricting bankers’ pay. These restrictions largely amount to reducing short-term cash bonus payouts, increasing the use of restricted stock and options, and requiring the executives to hold the restricted stock and options for a period longer than the usual four-year vesting period. This chapter argues that the proposed pay restrictions are unlikely to stop the next financial crisis and are likely to damage the financial sector. A better solution would impose higher and pro-cyclical equity capital requirements on banks combined with a requirement to raise contingent long-term debt—debt that converts into equity in a crisis.

Keywords:   banking crisis, financial crisis, bankers, compensation, financial regulation, equity capital requirements, banking regulation, long-term debt, financial reform

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