Senior banking executives are "insulated" financially from the consequences of risky lending, while other employees pay the price through lost bonuses, according to the Australian prudential regulator.
APRA chief executive Wayne Byres says a review by the regulator found senior executives are less likely to have their bonus cut than other employees.
Mr Byres told a business summit in Sydney that executive remuneration should reflect the manner in which profits are made, and not just how large those profits are.
"If variable remuneration is rewarded based primarily on 'how much', without sufficient regard to the 'how', it creates incentives for short-term risk taking, and a disregard for risk and control frameworks," Mr Byres said on Wednesday.
"Fine words and aspirations about the importance of risk and compliance - the tone from the top - will be undermined if it seems that senior leaders are operating in accordance with a different set of rules."
APRA, which in the past year has imposed stricter lending criteria on banks to reduce risks in the housing market, released a review of 800 case studies on Wednesday.
It found that practical application by lenders of risk management frameworks were often "less than robust".
"Such a situation - where poor outcomes are not reflected in remuneration, even when (or more likely, because) short-term financial targets are hit - can only serve to weaken the risk culture within financial institutions," Mr Byres said.
