BASING bankers’ rewards on return on equity (RoE) encourages short-term thinking and is in part to blame for the financial crisis, Robert Jenkins from the Bank of England’s financial policy committee (FPC) told a conference in Paris yesterday.
“RoE is a convenient target,” he said, but it has made “many bankers rich and loyal shareholders poor”.
It can be hit by increasing return, or decreasing equity, he explained.
This meant bankers collected short-term rewards, but failed to build long-term shareholder value.
“The risks that are run over time may produce short periods of apparently high “returns” for which the loss-making risks come later,” he said.
The solution, he said, is to make bankers either wait for a decade to see the value they have added, or adjust rewards on a risk-weighted basis.