By 2007, CEO compensation would have reached $ million. That is precisely in line with their actual payouts. If you believed ROE were a reliable performance metric, US bank CEOs would have had a watertight defence back in 2007. Indeed, it was the L’Oreal defence: because we’re worth it. But experience since suggests this performance was cosmetic. ROE flattered returns, and hence compensation, in the upswing. That is hardly surprising since it puts risk ahead of return and short-term ahead of long-term performance. When the downswing came, the volatility of equity returns sent many banks to the wall. Equity-based incentive contracts helped propel them there. Firm-level evidence could not be clearer. In 2006, the top 5 equity stakes of US bank CEOs ran as follows: Dick Fuld (Lehman Brothers), James Cayne (Bear Stearns), Stan O’Neal (Merrill Lynch), John Mack (Morgan Stanley) and Angelo Mozilo (Countrywide) (Fahlenbrach and Stulz (2011)). We know how these disaster movies ended. So having been divorced for almost two hundred years, ownership and control have been reunited. But they are an odd couple. Their marriage contract encourages both partners to behave in a volatile, short-term fashion. The marriage itself is destined to last less than a year. In the mid-19th century, unlimited liability was said to be deterring investors of “fortune, intelligence and respectability”. For very different reasons, today’s governance arrangements might be suffering the same fate. Banking and public policy The previous sections identified four forces which have shaped risk-taking incentives for over a century.
It will require large investment and the development of new green technologies which are more expensive. Moreover, regulation, including tax measures, implemented by various countries will impact the value of Russian exports. The global transition to the green economy might reduce the export potential of a part of Russian enterprises, while expanding the potential of others. In this regard, it is critical not to miss the moment of a turnaround in the economy and, accordingly, the financial sector as well. Besides challenges to future growth, we now need to consider financial stability risks especially closely as they have intensified during the pandemic. As we know, there are many countries and companies that have accumulated enormous debts. It was not that hard to service them when interest rates were low. However, an increase in interest rates might alter the situation dramatically. A number of countries and the global economy in general might face new financial problems, a wave of bankruptcies, and rising market volatility. We are not able to influence these processes, yet we are capable of mitigating their implications for the Russian economy and can reduce its sensitivity to possible global upheavals. To this end, it is vital to avoid the accumulation of internal mismatches and prevent any bubbles in the market. Currently, we are especially closely monitoring retail and mortgage lending in the banking sector. According to our estimate, growth in mortgage lending might exceed 20% as of the end of the year.