Risk, Reward and Bank Resilience

Abstract

Decisions are taken by human beings, not by inanimate institutions. So the determinants of the preferred risk profile of an institution, such as a bank, will be influenced primarily by the incentives facing the bank managers, with structural regulation of that bank often perceived by the managers as an obstacle to be surmounted in pursuit of their preferred risk profile. This implies, perhaps, that the functional regulation of banks should play a secondary role to a more direct concern with the incentive structure facing such bank managers, and that there should be a willingness to intervene in order to recast such incentives, should they be regarded as inappropriate.