The resulting financial landscape would, however, look rather different. There would be greater specialisation and diversity. The shopping experience for a banking customer would be more farmers’ market than supermarket. •  Governance – stakeholders versus shareholders  In deciding appropriate corporate governance arrangements, economists have tended to focus on the relationship between shareholders (as principal) and managers (as agent). Principal-agent problems arise when these two parties’ incentives are misaligned. Profitrelated pay is one means of achieving alignment, with managers remunerated in line with shareholder returns. In addressing one incentive problem, however, this approach may risk worsening two others – between shareholders and depositors on the one hand and between shareholders and the public sector on the other. Limited liability means that returns to shareholders are capped below at zero, but not above. That provides a natural incentive for owners to gamble, pursuing high risk/high return strategies from which they import the return upside but export the risk downside to depositors or the public sector. During this crisis, the pursuit of those strategies has resulted in the public sector picking up the cheque for the downside in an effort to reduce risks to depositors. A mutual model of corporate governance gives rise to a rather different set of incentives. Instead of external shareholders, savers and borrowers become the owners, with profits remitted directly to them in the form of higher deposit rates and/or lower borrowing rates. For that reason, measured profit margins appear consistently lower for building societies than for banks.
There is plenty to work on and think about. Finally, let me take up one other question that Stan has posed: Do I think you need to be an economist to be the President at the New York Fed? I don’t think so. If you look at the past five Presidents – Volcker, Corrigan, McDonough, Geithner, and myself, some have been economists, some haven’t. Yet I think all my predecessors have been very effective. I think there are other attributes that are more important than being an economist: 1) An analytical orientation; 2) the ability to synthesize a broad range of material so as to understand the interactions of markets, financial institutions, and regulatory and macroeconomic policy; 3) open-mindedness and pragmatism – the world is complicated and ever changing; and 4) the ability to lead – that means identifying the key issues and motivating people to do their best work in order to develop new insights and approaches. Having an economics background probably helps, especially on the analytics side, but, in my view, is by no means necessary and certainly not sufficient. One point on which I am certain is that regardless of the background of the President, having a very strong research group is essential. Thanks for your kind attention. 4  BIS central bankers’ speeches