Question

After financial crisis, What is the problem of the compensation policy of financial dindustry and how they improved?

Answer 1

Financial markets have recovered substantially but vulnerabilitiesremain significant. Ample liquidity may lead to new bubbles,particularly in some emerging markets, and uncertainties aboutgovernment exit strategies and regulatory changes threaten a fledgling upswing. Co-ordination and communication of exit policies will beimportant, and exit from policy stimulus should not be precipitated at the current juncture. While financial institutions have increasingly obtained market financing and paid back state aid, the sector remains fragile; thus, such voluntary pay-backs should meet preconditions aimed at ensuring the soundness and sustainability of the concernedinstitutions’ balance sheets. At   thesame time, expectations of futurewritedowns and more stringent capital rules put pressure on banklending more generally. Restarting securitisation to support lendingwould be important and could be fostered by government initiatives focussing on standardisation, transparency and due diligence to restoreinvestor confidence. Regulatory reforms currently being proposedconcern accounting rules, capital requirements and compensationissues.

However, further reforms are required to address such systemicissues as moral hazard createdby public support. Measures wouldinclude resolution mechanisms forlarge and systemically importantbanks as well as appropriately fire-walled business structures for thefinancial sector. Peer pressure via co-operation in internationalstandard-setting and relevant bodies should help to keep the reformmomentum, overcome political impediments to reform and maintain alevel playing field.

There are some issues are as follows :-

Financial markets have recovered substantially since March 2009 when thefinancial stress began to ease and market conditions started to improve.With easy monetary policy and large fiscal support to avert larger financialand economic shocks, liquidity and credit risk premiums have narrowedsignificantly. Market value gains have now, globally, neutralisedabout 60% of the losses incurred since the onset of the downturn. While financial markets have entered a period of relative tranquillity andthe outlook for economies has improved,

1 the effects of the financial crisislinger and vulnerabilities remain, as some of the negative feedback loopsare working their way back from the real sector (which was affected by adelay bby the first wave of the financial crisis). Should the various risks for the financial sector materialise in the current conjuncture, their impactcould be relatively more significant than under more stable circumstances.