The global banking crisis that erupted in 2008 showed the complete irresponsibility of bankers towards their stakeholders. Not only did shareholders and clients suffer, but so did the broader economy. And it still hasn't fully recovered, with ramifications still being felt across the globe.
According to Nassim Taleb, the author of 'The Black Swan', the repeated bailouts of these banks has led to a situation where it is possible for them to hijack society. Some banks and financial institutions like AIG and Citigroup received a large chunk of the bailout money as they were termed as 'Too Big to Fail' or TBTF. According to CNN Money, US$ 204.8 bn was given to various banks as part of a 'Capital Purchase Program'. Only half of this has been repaid, and a good US$ 108.5 bn of public money is still stuck with the banks.
Taleb states that the current incentive system is at the crux of the problem. He calls this an "agency problem". When the banks make money, they take home fat bonuses. But when they lose, the taxpayers and the future generations have to pay the price. Society has to pay for the losses, while the gains are privately shared among a few individuals. This is the classic, 'Heads I Win', 'Tails you Lose' situation. And as long as we continue to fund bailouts, we condone bad behavior rather than punishing it. We agree with Taleb when he says that some global banks have become nothing other than huge cash machines manufacturing top dollar bonuses for their employees and managements. Plus, some of them have now become even more powerful post the crisis since they now have a lobby in Washington.
So, what is the situation like in India? Is society at the mercy of our domestic banks? Well, for one, incentive pay in India's public sector banks is still well below global benchmarks according to a recent report by the Boston Consulting Group. Variable pay comes in at just 2% of the fixed component compared to 12-15% which is optimal for incentive pay. Thus, they are as not prone to indulge in short term profit making gimmicks. Plus, a prudent regulator like the RBI is always keeping itself abreast of current happenings, and likes to stay one step ahead of the game. This helped India stay relatively insulated from the global financial meltdown. We believe that this conservative approach will hold our banking system in good stead going forward as well.