What's Happening?
The Financial Stability Board (FSB) established principles and standards in 2009 to align bank executive compensation with long-term performance, aiming to curb excessive risk-taking. These standards call for a substantial portion of variable remuneration
to be deferred and linked to long-term outcomes, though they do not mandate a cap on the ratio of variable to fixed pay. The FSB emphasizes the role of supervisors in promoting adherence rather than requiring national regulation for compliance. However, implementation of these global standards has varied significantly across jurisdictions. Following the 2023 banking turmoil, which identified weak compensation practices as a factor in the failures of Silicon Valley Bank and Credit Suisse, policies have diverged further. Switzerland is moving towards stricter rules, while a US reform proposal has stalled, and the UK has loosened its requirements. A recent paper by Gelos et al. (2026) examines the evolution of executive compensation since the Global Financial Crisis and its impact on bank risk.
Why It's Important?
The divergence in implementing FSB compensation standards has significant implications for the stability of the global financial system, including the U.S. financial sector. The stalled reform proposal in the U.S. means that American banks may operate under less stringent compensation rules compared to their European counterparts, potentially exposing them to higher risk-taking incentives. The failures of Silicon Valley Bank and Credit Suisse underscore how weak compensation practices, particularly those tied to short-term earnings without explicit risk metrics, can contribute to financial instability. If U.S. banks continue with less rigorous deferral requirements and performance metrics that do not adequately account for risk, they could face increased vulnerability to future financial shocks. This situation could create an uneven playing field, where U.S. institutions might be perceived as having higher risk profiles, potentially affecting investor confidence and regulatory scrutiny.
What's Next?
The future trajectory of bank executive compensation in the U.S. remains uncertain given the stalled reform proposal. The ongoing global divergence suggests that U.S. policymakers and regulators will need to re-evaluate their approach to align with international efforts to mitigate systemic risk. The findings from studies like Gelos et al. (2026), which indicate that longer deferrals are associated with lower systemic risk and improved credit ratings, could pressure U.S. authorities to revisit stricter remuneration guidelines. The experience of the 2023 banking turmoil highlights the critical role of governing boards and supervisors in overseeing compensation frameworks. This could lead to increased scrutiny of how U.S. banks' performance measures reflect deteriorating financial conditions and whether deferrals are truly effective in disciplining risk-taking behavior.
Beyond the Headlines
The debate over bank executive compensation extends beyond immediate financial stability to broader questions of corporate governance and accountability. The inconclusive evidence regarding bonus caps suggests a complex interplay between regulatory design, market competition, and human behavior. While caps aim to reduce incentives for shifting risk onto taxpayers, banks might respond by increasing fixed remuneration, potentially undermining the intended effect. The failures of banks like Silicon Valley Bank highlight a deeper issue: even with deferral mechanisms in place, if performance metrics do not accurately reflect risk, the disciplining effect is weakened. This points to a need for more sophisticated and comprehensive risk-adjusted performance measures in compensation design, moving beyond traditional metrics like return on equity, which can incentivize excessive leverage. The ethical dimension of executive pay, particularly when it contributes to systemic risk borne by the public, will likely remain a contentious issue.
