Promoting Bank Stability through Compensation Reform: Lessons from Iceland

Authors

  • Jay Cullen
  • Guðrún Johnsen

DOI:

https://doi.org/10.13177/irpa.a.2015.11.2.11

Keywords:

Bankers pay, compensation, policy making, financial regulation, prudential regulation, financial crisis, special purpose vehicles, total-returnswaps.

Abstract

This article argues that the program of compensation reform at financial institutions – despite recent wide-ranging changes – remains incomplete. A considerable body of theoretical and empirical research has been developed which, for the most part, suggests that compensation incentives embedded in compensation contracts at banks encouraged risk-taking behaviour which contributed to the Global Financial Crisis. Extensive reforms to compensation rules at financial institutions have been implemented across the globe, including increased use of deferral, mandatory capping of bonuses and the introduction of claw-back powers. Relying on observations on the failures of Icelandic and UK banks, and legal and economic analyses of compensation reforms in each jurisdiction, this paper argues that some elements of the Icelandic and UK reform programs ought to be transposed to the EU level. Arguably, these recommendations will help improve the resilience of the European banking system and contribute to greater financial stability.

Author Biographies

Jay Cullen

Assistant Professor, University of Sheffield School of Law.

Guðrún Johnsen

Assistant Professor at University of Iceland.

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Published

2015-12-15

How to Cite

Cullen, J., & Johnsen, G. (2015). Promoting Bank Stability through Compensation Reform: Lessons from Iceland. Icelandic Review of Politics & Administration, 11(2), 333–354. https://doi.org/10.13177/irpa.a.2015.11.2.11

Issue

Section

Peer Reviewed Articles