The reason is that markets have come to expect the initial central bank move – no matter how incremental – to be followed by many similar moves in the same direction. This effect is likely to be greater in conditions where there is an exceptionally large amount of monetary stimulus in place.
Banks that have received TARP capital can expect to see some efforts by examiners to confirm compliance with the requirements of the Treasury Department's investment agreements. However, compensation plans for other banks will not escape attention. Banks should expect to see a growing focus on the incentives embedded in compensation plans, with examiners discouraging incentive structures that foster excessive risk-taking.