Watchdog sniffing out bonus peril

In a speech yesterday at the Securities & Investment Institute annual conference, FSA chief executive Hector Sants highlighted how the risk inherent in an institution is increased by a pay and bonus structure that rewards people for success but does not penalise them for failure, or which allows them to collect their money and run before the full awfulness of what they have done becomes apparent.

It follows, therefore, in assessing the overall risk of an institution that the regulator needs to consider the risk that the pay structure will encourage greed rather than fear.

Clearly if the FSA did this in the past, it did not do it very well but Sants' message is that this is going to change. It is not interested in how much people earn - or get given even if they don't earn it - for that is a matter for shareholders, he says. But it is going to give a lot more emphasis in future to an assessment of the pay structure to see if it does in fact work to minimise risk rather than add to it.

This could be the start of something big. Shareholders on their own are clearly never going to secure reform because memories are short, and executives will quickly sink back into their bad old ways.

But the FSA has the clout as part of the assessment process to put a risk loading on bonus schemes it dislikes that is so heavy it makes them uneconomic. If it has the courage to do this, we may begin to get somewhere. I despair of ever getting banks to realise that incentivising staff to do deals, make loans and expand the balance sheet regardless of the quality is asking for trouble. But at least the FSA realises it now, so that's a start.

Banks' tumble isn't over yet

It is all very well for Bradford & Bingley's directors to make mealy-mouthed excuses about why they categorically denied a press report three weeks ago that they were planning a rights issue, but their problem is not with the press. If I were them, I would worry about being sued.

There is no doubt that news of an intention to raise additional capital would have been a material, price-sensitive announcement. If the plans were indeed being explored when the denial was issued, it would surprise me not one bit if some disgruntled shareholders went after them. Rightly so, if indeed they prove to be culpable. It is not the job of directors to mislead shareholders, however cleverly they think they have chosen their words at the time. And it is certainly not the way to restore trust in banking.

But there are more interesting things around. I particularly like the comment of a fund manager yesterday, when Barclays held off from announcing any plans to raise new capital, that the question now was whether Barclays will have one rights issue before Royal Bank of Scotland has two. His point was that in his view the £11 billion being raised by RBS, though massive, is not as much as its needs.

If the economy slows as predicted and losses begin to mount in commercial property, private-equity financed business and mainstream lending, all the banks will come under renewed pressure. RBS, because of its size, will suffer more than most, and may again find itself short of capital. One cannot get away from the fact that if banks create a credit crunch by losing 60% of their ability to lend, it must have massive knock-on effects in the wider economy that have not yet been taken into account. The message is that bank shares still have further to fall.

Come-uppance for Kazakhmys

Good to see that even in these markets actions can speak louder than words.

Last weekend, Eurasian Natural Resources Corporation, the 22nd-largest company in the FTSE 100, albeit a Kazakhstan one, was criticised rather unjustly in some newspapers after copper producer Kazakhmys - also in the index, at 37 - rejected a potential bid by it. But on Wednesday ENRC bounced back with a massive increase in earnings, which dispelled any lingering clouds and sent its shares soaring.

The biter now looks bitten. Kazakhmys rejected an offer that looked very fair on the fundamentals, and probably now has a lot of stale bulls in the stock, while ENRC wins new admirers not only for its operational performance but for refusing to overpay. Justice appears to have been done.