Regulating the Financial Sector

The Securities and Exchange Commission has proposed compensation rules that are intended to discourage irresponsible risk-taking - 'heads I win, tails I break even' - in the financial sector. Included in the proposed regulations is the deferral, for at least three years, of at least fifty per cent of the cash portion of incentive pay as well as the ability to claw back part of that pay to reflect subsequent losses.

Although this is a start, it is unclear whether it will be effective in reducing risk. The one certainty is that there will be unintended consequences as really bright bankers learn to comply with the letter of the rules while evading the intent. In short, the vast majority of bankers will continue to favor their own interests over those of the companies that employ them and, more importantly, their customers.

The financial sector would serve the economy better, with less risk, if every financial professional were to spend a brief period at the start of every day reflecting on this simple story:

One day, J.P. Morgan was listening to a younger banker who was enthusiastically describing the new yacht that he had recently purchased. Finally tiring of the younger man, Morgan silenced him with a single question:

"But where are the customers' yachts?"

If J.P. Morgan's attitude were the norm now, there would be much less need for costly and time consuming regulation.