As long as it remains the case, it raises questions about whether the lessons from the crisis have truly been learned. Races in financial sector pay can also be tackled, albeit indirectly, by placing restrictions on leverage and by avoiding linking remuneration to return on equity targets. Restrictions on cash distributions by banks to shareholders and staff can also help. This has been a favoured recommendation of the FPC over the past six months, as a means of bolstering UK banks’ capital defences against risks in the euro-area. In response, there is some evidence of UK banks having modestly reduced cash distributions to staff in 2011. A more direct approach to tackling pay races would be to set remuneration codes. This can be justified as a regulatory means of leaning against excessive risk-taking incentives – incentives which might be fanned by remunerating in equity.31 These have already been developed by the Financial Stability Board internationally and by the FSA in the UK. They specify, for example, maximum ratios of cash distribution and minimum periods of pay deferral. Yet whether these codes go far enough in aligning pay and performance, in equating risk and return, is an open question. For example, consider the issue of pay horizons. Bonuses are typically set on an annual cycle, with deferral or claw-back for maybe three or four years if guidelines are followed. But this return cycle is materially shorter than the typical risk cycle. The risk cycle might last perhaps 20 years.
Ruin is the destination to which all men rush, each pursuing his own best interest in a society that believes in the freedom of the  1  Byatt et al (2001). 2  Science News (1983). 3  Frank (2011). 4  Ridley (1993). BIS central bankers’ speeches  1  commons”.5 Therein lies the tragedy, the market failure. This situation is made more, not less, tragic by unbridled competition. The tragedy of the commons is one example of an age-old problem of military arms races. The incentives of individual players, and outcomes for society, are much the same as in commons tragedies. Individual country incentives are to increase military might, to leapfrog opponents to improve national security. But this game of leapfrog is a Red Queen Race. The quest for national safety results in a steady rise in military spending and a steady fall in both societal and national security. The common good is jeopardised. These arms-race dynamics, and commons tragedies, have a history in economics too. It is not just plumage that is conspicuous. As Thorstein Veblen set out at the end of the 19th century, so too is consumption.6 Some goods serve as a signal of social standing: they are positional. Not everyone can have the apartment which is closest to the sea. As in other arms races, the equilibrium is a sub-optimal one – a competitive shopping war in which everyone conspicuously over-spends. And so it is with economic behaviour more generally.