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7 Sep, 2009 06:19

Nobel Economist says bank bonus’ need to reflect financial risks

The G20 called for the bonuses a bank can guarantee staff to be capped. But in an interview with RT, Nobel Prize winner Robert F. Engle III claimed the plans are misguided.

“We shouldn't ban bonuses, but restructure the way they're paid so they're more commensurate with the risk the company is taking. If a company takes a risk and they go bankrupt, then people lose money, it's not the end of the world, it's the penalty for taking too much risk. But if this company brings down the financial system, then all of a sudden they're being prevented from taking the losses.”

RT: Some leading economies like France and Germany want more control over the financial system, would you be in favour of such a move?

“What's important is we give the banking system the right incentives to figure this out. When companies get too big and too complex to fail, they would face a higher tax rate, which would go into a rescue fund. The banks are not excited about it, they would rather go back to business as usual.”

RT: Tell us about some of your other theories that are important to the current economic crisis.

“Banks have become too big to fail because when a bank like Lehman goes under they're counterparties for thousands and thousands of deals.

There are two proposals. One is to move these products to exchanges or centralised clearing, so we don't have counterparties. Banks resist it because they make a lot of money on these over-the-counter deals. But second of all we need more transparency in the remaining products, and we should know how much exposure we have. AIG sold lots of insurance on very risky products. Yet not everyone who bought this insurance recognized that, in the worst case, it wasn't worth anything.”