Firms still need to do more to limit risk-taking, Fed study says

7 October 2011

Financial firms and banks still need to do more to curb risky behaviour through their bonus payment infrastructures, a study by the Federal Reserve (Fed) has revealed.

A report by the Fed showed that some changes have been made with senior bankers now deferring up to 60 per cent of their bonuses - at some institutions professionals have more than 80 per cent of their additional compensation deferred.

Regulators launched an investigation into pay practices at 25 firms as part of an initiative to reduce the incentives which could lead to potentially risk-creating behaviour.

In conclusion, the Fed said that although large banking organisations have made significant progress “toward enhancing their incentive compensation arrangements in ways that provide appropriately balanced incentives to take risk … most firms still have significant work to do to achieve full conformance with the interagency guidance”.

Pre-crisis, many banking institutions did not pay attention to the potential dangers of incentive schemes which could see employees “provided with incentives to take imprudent risk”.

Organisations which participated in the report included Citigroup, Bank of America, Bank of New York Mellon and Goldman Sachs.

By Jim Ottewill

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