Financial industry analyst to discuss bankers’ pay regulation during visit to ISU

February 14, 2011

A highly regarded banking regulation expert will discuss regulation of bankers' pay during a Feb. 22 event at Indiana State University.

David VanHoose, a senior fellow at Networks Financial Institute (NFI) in the Scott College of Business at ISU, will present "Regulating Bankers' Pay: Is It Fair?" A reception will be at 4 p.m. on Feb. 22, with VanHoose's presentation scheduled for 4:30 p.m. The event will be held in Hulman Memorial Student Union, DEDE II at ISU.

In his presentation, VanHoose will survey evidence regarding the relationship between bank management compensation and risk. He will also discuss the arguments for proposed and actual regulations of bankers' pay, along with the pitfalls associated with such regulations.

VanHoose will be speaking about some of the research he has done on regulation of bankers' compensation, said John Tatom, director of research for NFI. The Dodd-Frank Wall Street Reform and Consumer Protection Act includes extended regulation of bankers' pay, especially bonuses. Such legislation regulating compensation bankers receive was a key response Congress and industry regulators had to the recent financial crisis, Tatom explained.

"Some regulators and congressional leaders believe that compensation levels and the structure of compensation, especially bonuses, create incentives for excessive risk-taking, and that this contributed to the crisis," Tatom said.

In his presentation, VanHoose will explain that bankers' compensation is determined in competitive labor markets, and that restricting compensation could affect the quality of employees in banking, Tatom said. Also, the restrictions could raise risk-taking while lowering the rewards for taking risk, which is contrary to what political leaders and regulators wanted to gain from the legislation, he added.

"The key lesson is that compensation regulation can have unintended consequences that are counter to the goals of regulators," Tatom said of VanHoose's presentation. "As a result the competitiveness of one of the nation's most productive sectors can be impaired and the regulations could increase the riskiness of the banking industry."

Political leaders and regulators have created several new initiatives, such as the Dodd-Frank Act, in an effort to prevent future financial crises.

"Academic researchers will be examining the crisis and these efforts for years to come," Tatom said, "and it is likely that political leaders and regulators will have to revisit and refine many of their recent efforts."

VanHoose, the Herman W. Lay Professor of Private Enterprise at the Hankamer School of Business at Baylor University, is a widely-quoted industry performance and regulation expert. Several of his published NFI policy briefs are available at www.isunetworks.org.

Founded in 2003 through a grant from Lilly Endowment, Inc., NFI strives to facilitate broad, collaborative thinking, dialogue and progress in the evolving financial services marketplace, focusing on the areas of education, outreach and research.

Photo: http://isuphoto.smugmug.com/photos/1183427796_dBbwD-L.jpg (Submitted photo)

David VanHoose

Contact: John Tatom, director of research, Networks Financial Institute, Scott College of Business, Indiana State University, 317-536-0281, ext. 712, or john.tatom@isunetworks.org.

Writer: Austin Arceo, assistant director of media relations, Office of Communications and Marketing, Indiana State University, 812-237-3790 or austin.arceo-negrich@indstate.edu.