To begin with, proper incentive structures need to be incorporated into rules and market practice. For example, senior management requires incentive structures which have time horizons that are consistent with the risk profile of the institution.
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.