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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?

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

Steven N. Kaplan

Publisher:
Columbia University Press
DOI:10.7312/columbia/9780231160155.003.0012

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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