For years, hockey players believed that anyone who wore a helmet was hurting his performance relative to everyone else on the ice. Is the same thinking true for banks? Photograph by B Bennett/Getty

Better late than never. That’s one way of looking at the proposed new restrictions on banker compensation that U.S. regulators released last week. The rules will require top earners at big financial institutions to wait four years to receive a substantial portion of their incentive-based pay, and will force companies to claw back bonuses from employees whose decisions turn out to be responsible for big losses. The new regulations, which were mandated by the 2010 Dodd-Frank financial-reform bill, were supposed to have been put in place soon after that legislation was passed, but it took five years for the six responsible agencies to put together a reasonable proposal. (And it will be months yet before the individual agencies approve the rules and put them into effect.)

The delay means that, to some extent, the impact of the new rules will be less significant than it would once have been, since, in the wake of the financial crisis, banks already made changes in the ways that they pay top executives. Almost all of them now defer some portion of bonuses for three years, and some defer them for longer than that. Many have clawback provisions as well. Still, the regulations should make a difference: they apply to a wider group of employees, make pay susceptible to clawbacks for seven years, and extend the bonus-deferral period.

If the rules are approved, then, they will, at least on the margin, discourage reckless behavior by bank employees—it will hold them more accountable for their actions and make it harder for them to reap short-term gains from decisions that have negative long-term effects (such as making risky trades or loans, both of which happened regularly during the run-up to the financial crisis). This should, in turn, benefit the banks, by aligning employee incentives with firms’ long-term health. Which raises an interesting question: Why didn’t the banks put stronger rules in place long ago?

Some might reflexively answer that bankers are greedy bastards who don’t care what happens to their companies in the long run. But, even if that were true of individual employees, bank shareholders and boards of directors (which set compensation rules) presumably care quite a bit about the health of their companies. The financial crisis demolished bank stocks—shares of Citigroup and Bank of America, for example, are still trading well below where they were a decade ago. Preventing cavalier risk-taking is clearly something that boards of directors should want to do. And, in fact, they did take some steps to reform pay practices, but only after it became obvious that tougher regulations were eventually coming down the pike.

To understand both why the banks didn’t go further on their own and why the threat of regulation helped things along, even before the rules were agreed upon, it’s worth consulting a famous essay from 1973 by the social scientist Thomas Schelling, written on the subject of hockey helmets. At the time Schelling was writing, the N.H.L. had yet to require players to wear helmets, which had been around for decades. Players were allowed to wear them, but the vast majority did not, even though this increased their chances of serious injury, and despite the fact that informal polls suggested that many players would have preferred to use them. The problem was that, while not doing so had obvious costs, it also had perceived benefits: a player's peripheral vision was slightly better, for one, and it conveyed a sense of toughness. As a result, players tended to believe that anyone who wore a helmet was, in effect, hurting his performance relative to everyone else on the ice.

Schelling’s point was that in situations where the consequences of a choice depend on the choices that everyone else makes, “people can get trapped at an inefficient equilibrium, everyone waiting for the others to switch.” And individually rational choices, such as the choice not to hurt your performance by wearing a helmet, can add up to a collectively irrational outcome. As Schelling notes, there are a variety of potential ways to get out of an inefficient equilibrium, but one obvious (and effective) way is to have an external authority change the rules. The N.H.L. did so, in 1979, requiring helmets for everyone but those players who had already entered the league; now everyone wears them.

A similar dynamic has been at work in banking. Bonus clawbacks, for example, reduce the chances that bank employees will take foolish risks or engage in fraud, and so would seem to make banks “safer.” But banks are competing against each other for talent. And, in that competition, any bank that insisted on clawbacks would be at a disadvantage. Even smart traders or executives can make bad bets in financial markets. So, all else being equal, prospective employees would almost certainly opt for a contract that didn’t include the threat of clawbacks over one that did. This competitive pressure therefore discouraged widespread adoption of a practice that, if all banks did it, would improve their long-term health. Like helmetless N.H.L. players, the banks were stuck in an inefficient equilibrium, because no one wanted to be the first one to switch.

One implication of this is that the banks, if not individual executives or traders, should welcome the new, tougher rules. By mandating clawbacks and requiring bonuses to be paid out over a longer period of time, the government is levelling the playing field for the industry’s competition for talent. The move leaves the banks better-protected against blowups, and puts their employees’ interests more in line with their own. This is the paradox that Schelling’s essay exposes: sometimes, having your freedom restricted makes it easier to do what you wanted to do in the first place.