18 Oct 2009

Paradox of Banking reform

News that some investment banks are on the way to make record profits this year and as a consequence will be able to pay very high bonuses to their staff highlights a paradox: Governments and Regulators so far have been unable to agree on any meaningful and coherent approach to banking reform but at the same time are unhappy about the results of their inaction. Businesses that are successful are encouraged to do the opposite of what they are supposed to do in a market system: to maximise their profits. The result is a muddle where firms may avoid paying out the bonuses they think their staff are due. In a roundabout way this may well benefit the affected staff in a positive way as the higher level of retained profits will lead to higher share prices in the longer term. This will allow staff to realise higher profits on their share options and shares.

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