The expected rewards include any financial and psychic benefits to the individual from the behavior if undetected. Improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an obligation to behave properly, and be prevented by others from carrying out bad behavior. In addition, a strong culture can also reduce the rewards some employees may hope to enjoy. In its simplest form, a strong culture means that individuals who get away with unethical or illegal activities will not have the satisfaction of “bragging rights” about their actions because there are no congratulations for breaking the law or outwitting compliance. A strong culture will reinforce the simple reward of having done the right thing. A clear conscience can be a powerful reward. A well-designed compensation structure can also help favorably tip the balance by effectively extending the time horizon of senior management and material risk-takers, and by forcing them to more fully internalize the consequences of their actions. There are two important dimensions of the structure of compensation – first, how much compensation is paid out  4  BIS central bankers’ speeches  immediately versus deferred into the future, and second, the form of the compensation that is deferred – cash, equity, equity options or debt. For deferred compensation, the rules for how it vests and under what conditions it can be forfeited are important. Getting the balance right is critical.

Besides dealing with short-term volatilities, another related challenge that has come with the reality of QE tapering is maintaining strong economic outlook. Specifically, recent data seem to suggest that signs of economic softness that are reflected in, for instance, deteriorations in the current account performance and weak public finances, are likely to amplify the probability of abrupt flow reversals. That is, the remaining pool of funds seems to differentiate between their investment destinations based more on fundamentals, as is exemplified in the recent episodes of substantial outflows in some of the “Fragile Five” countries. BIS central bankers’ speeches  1  6. When looked at from this fundamentals perspective, Thailand’s recent economic slowdown and political setback definitely come to mind as another growing concern. Particularly, manufacturing production and private spending have already shown signs of moderation in the midst of political uncertainty and poor economic outlook. This, combined with the likely additional delay in public spending, could have further dampening effects on growth. Moreover, should the current political situation persist, prolonged political instability will certainly have dire consequences firstly on the tourism industry but also eventually on our ability to maintain and attract the FDI flows. The country’s higher credit default swap, if left unchecked, could lead to higher funding costs in the financial markets and certainly constitutes another challenge going forward. I do hope, however, that political uncertainty will be a short-term factor and that political stability will be achieved again once agreements are reached among the different groups in the society. 7.