Clearly, a managerial remuneration scheme which depends exclusively on the bank’s current performance places managers in a situation similar to limited-liability shareholders. They cash in on lucky gambles but bear few of the negative consequences of unlucky ones. Unless we are willing to question the notion of limited liability for managers (as does Kotlikoff, 2010, for example), this kind of consideration provides the rationale for regulating managerial remuneration, and in particular for imposing long waiting periods before managers can cash in bonuses.5 A very careful design of managerial payment structure is needed if we want to ensure that the risk decisions of self-interested managers are in line with the longterm interest of firm owners and society.6 Bondholders Let me now turn to the issue of whether bondholders – the final stakeholder group – contribute to a balanced weighting of risk and return in a bank’s decisions. Under normal circumstances, discipline arises through the possibility and reality of default and eventually bankruptcy. Bondholders who are deprived of the upside potential of the risks taken by the bank and lose part (or all) of their stake in the event of default can be counted on to ensure that the negative consequences of the risky gambles taken by the bank are given proper weight. Indeed, the cost of debt increases with additional risk-taking, thus reminding managers and shareholders of the downside of the risks they are naturally inclined to take.
Muhammad bin Ibrahim: Scaling up excellence – creating opportunities while mitigating risks Keynote address by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of Malaysia, at the Regional Conference on Money Services Business “Scaling up excellence – creating opportunities while mitigating risks”, Kuala Lumpur, 19 May 2014. *  *  *  I’m glad to be here with you today to join Mr Mathew A. Verghis in welcoming you to this regional conference on money services business. On behalf of Bank Negara Malaysia, I would like to thank the World Bank, the Malaysian Association of Money Services Business, and the International Association of Money Transfer Networks who partnered with us in organising this event. This conference aims to bring together regulators and industry players to review developments in the money services business industry at a time when there are significant changes occurring in the financial industry. In many countries, money services business plays an important role in complementing banking institutions to provide financial services to the community, in particular, the unbanked and small business communities. Given the forces of change that are reshaping the financial industry, it is timely to consider how these forces impacted the expectations, opportunities and challenges for money services businesses. The money services business industry contribute to an important purpose in our communities. They provide financial services to segments of society in both the developing and developed world that do not have access to basic banking facilities and services.