Making banks more secure has become the holy grail of regulators writes Mark Roe.

Tying senior managers’ pay to the bank’s stability, the financial sector, advocates argue, would be forced to police itself. This incentive-based regulation could bolster economic stability more effectively than expecting regulators to keep pace with banks’ risky activities.

The proposal is not perfect – not least because bank managers’ compensation would still be tied to profits. If a banker is told that he or she will be compensated entirely in bonds this year, with the bank’s annual profits determining the number of bonds to be received, the banker would obviously want to boost this year’s profits – even if it required taking bigger risks.

Despite these challenges, a new, bond-based compensation strategy could enhance bank stability considerably. Though there is no silver bullet for bank regulation, implementing such a system with care and vigilance would be an important step in the right direction.