UK bankers' pay clawback should depend on how they manage risk and not on the outcomes of those decisions, a study suggests.
The Bank of England has looked at greater regulation to prevent banks from taking excessive risks to prevent another financial crisis.
But that could, in turn, have a negative affect on the banking sector, according to Warwick Business School.
John Thanassoulis, of Warwick Business School, said: “Clawback can induce appropriate risk taking incentives if bankers are made to believe that it will be applied proportionately according to the degree of failure in risk management.
“But it could work imperfectly on bankers’ incentives if they believe it could be triggered when their bank suffers large losses, even if they have conducted appropriate risk management and so making them excessively risk averse. It is therefore important that it is implemented judiciously.”
Since Lloyds and RBS were bailed out by the UK government, regulations have been put into place with the European Union imposing a bonus cap. Those bonuses can then be clawed back for seven to ten years if risks taken are deemed unnecessary in the hope that it will curb excessive risk taking.
The study by Warwick Business School found that bonus caps do not necessarily curb excessive risk taking, as the caps can stop incentive when making key decisions, but they found a clawback can help introduce the right incentive as long as it is applied after risk assessments.
There is a concern that it could prevent risk taking at all if bankers fear that clawbacks could be applied to risk outcome.
Thanassoulis added: “Banks can still have bad outcomes and make losses despite good risk management. At the moment bank managers have the sense that if the bank makes a loss they will be penalised no matter how good their risk management is.
“Clawback needs to be more nuanced so that it only penalises those bankers who have made bad decisions, otherwise, banks will become risk averse. We need a formalised process where decisions can be recorded and the route to that decision tracked at each stage – then we can have a more nuanced and balanced clawback system.”
