By now, you've probably heard of compensation clawbacks, when financial institutions take back pay from employees who are deemed responsible for acts of negligence, or outright illegal behavior. Although JPMorgan Chase's
Available since the crisis, but used primarily in Europe
Clawbacks took root in the financial world during the throes of the financial crisis. Swiss bank UBS
Sound tough? It is, but banks have been facing pressure from regulators and investors to retrieve monies given to those who don't deliver as promised or, worse, commit crimes that put the bank in jeopardy. Despite examples like these, a new study shows that only 17% of banks worldwide made use of the system last year. But all that may change, as more banks are hit with lawsuits regarding the LIBOR-setting scandal. The question is: Will American banks jump on the bandwagon as well?
JPMorgan sets the pace
So far, only JPMorgan has pledged to claw back millions in compensation from employees involved in the London Whale trading fiasco. Of course, the bank's losses have been pegged most recently at $5.8 billion, but it's a start.
Despite Dodd-Frank regulations that require U.S. banks to promulgate and enforce clawback policies, most institutions make their own rules as to when they will be levied, and the parameters are pretty soft. For example, many require proof of misconduct, whereas Dodd-Frank has no such requirement.
With big banks such as JPMorgan, Bank of America
Clawbacks probably won't make much headway toward paying back funds lost, but they would deliver a very important message to those who would play fast and loose with others' money. If banks take Deutsche Bank's lead, scofflaws would certainly think twice about any funny business, since even pocketed bonus money from previous employment won't be safe if they are caught. This system might even help prevent another meltdown -- good news for investors and taxpayers alike.
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