The recently published Financial Stability Forum’s Principles for Sound Compensation Practices 4 highlights this point and such perspectives are also generally relevant in the areas of accounting and disclosure. Not only micro-level incentives, but macro-level incentives also matter. Behavior of economic agents is importantly influenced by overall economic and market conditions.
When rival firms are generating excess returns through new strategies in a low interest rate environment, the incentives are clear. As in the now famous remarks, it is difficult not to join the party, if everybody is dancing to the music. This is where policy tools to mitigate procyclicality become essential.