Pay system perverts bank behaviour says professor
This week’s speaker asked if banks were behaving badly and answered his own question with six reasons why the way banks did business was different from other organisations.
Associate Professor Martin Lubberink has a distinguished academic pedigree and has experience in the Central Bank of the Netherlands before taking up his position at Victoria University of Wellington.
He recalled that back in 2008 just as the global financial crisis was starting to unfold, he was told that the rising number of foreclosures on housing loans in the USA was “an American problem” which was unlikely to spread to Europe. The judgment was woefully wrong.
Six weeks after he started his job with the Central Bank in the Netherlands “the troubles started (sparked by the collapse of Baring Brothers), and “we had to rewrite banking regulations over the next five years.”
He said the GFC exposes a lot of flaws, errors and bad practices in banking which had been there for some time, but became apparent, “when the tide went out during the GFC.”
Professor Lubberink quoted the just released interim report of the Royal Commission of Inquiry into Banking Practices in Australia that “too often banking behaviour was about greed”, which current governance and management practices did not constrain effectively. Further the culture and conduct of banks’ remuneration policies encouraged this in his view.
He had an interest in incentive pay which he said could be useful (particularly in straightforward sales situations) but too often drove undesirable behaviours.
In answer to a question, Professor Lubberink said that quantitative easing – the practice of printing money – to keep the economy ticking over had been useful during the GFC to prevent economic collapse but now needed to be phased down and ended.
John Bishop
Club Reporter.
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