Bonus structure encouraged bank risk-taking -HSBC

Banks have been encouraged to grow faster than was sustainable and the bonus system rewarding bankers has encouraged "excessive risk taking", which may have contributed to the financial crisis, the chairman of HSBC said.

"The market and industry will need to consider whether badly aligned incentives have contributed to the crisis," HSBC Chairman Stephen Green said on Monday.

Compensation structures have "so often encouraged too much opacity and excessive risk taking," he said.

Banks had until recently been encouraged "to grow fast and gear up, persuading them to take on higher risk than was sustainable," Green said here in a speech at the FT/Dubai International Financial Centre World Financial Centres Summit.

"This crisis is severe; it is without doubt the most serious for many generations, and it is hard to look beyond the sea of red on trading screens to the future," Green added.

He said the crisis will pass, however, but more international cooperation will be required "to place the financial system on a more stable footing".

"Free markets are in the dock today, as the full extent and pain of this crisis is revealed," he said, urging governments to avoid repeating the protectionist errors of the 1930s.

The rebalancing of the global economy towards Asia will also continue, and Asia and the Middle East will continue to outgrow mature markets, he predicted.

The high leverage model of bank finance "is bankrupt", but securitisation will survive, Green said. "You cannot bring the whole of the world's capital markets back on to banks' balance sheets," he said.