Bank director remuneration: Why no downside risk?


In this Financial Policy Brief, Professor Kevin Davis asks why bank board remuneration is not included in the list of limited distributions if a bank fails to meet the capital conservation buffer applied as part of the Basel capital requirements.

Since the board is ultimately responsible for capital adequacy planning, Professor Davis argues that they should also bear some of the costs if that planning is deficient. While board remuneration policies typically do not link non-executive director remuneration to bank performance, it is not apparent that some downside linkage is not optimal policy.

In 2010 a capital conservation buffer was introduced as part of Basel 3. It requires that if a bank’s capital ratio falls below a specified level, the bank is limited in terms of certain distributions (such as dividends and staff bonus payments) it can make.

But one form of payment not affected by this requirement is payments to directors, who are ultimately responsible for the performance of the bank. There are good reasons for changing the buffer requirements to also limit the ability of the bank to renumerate directors if a capital shortfall occurs.

Download the Financial Policy Brief 

This FPB was prepared by Professor Kevin Davis, Research Director at the Australian Centre for Financial Studies.

The ACFS Financial Policy Brief series provides independent analysis and commentary on current issues in financial regulation, with the objective of promoting constructive dialogue among academics, industry practitioners, policymakers and regulators and contributing to excellence in Australian financial system regulation.

To read more papers in the FPB series, click here.