Bank capital requirements and mandatory deferral of compensation

We analyze the interplay of capital requirements and mandatory deferral of compensation in reducing banks’ risk taking incentives. Two heterogenous banks fund uncorrelated projects with fully diversifiable risk or correlated projects with systematic risk. One of both banks can identify project types...

Full description

Saved in:
Bibliographic Details
Published in:Journal of regulatory economics 2018-04, Vol.53 (2), p.206-242
Main Authors: Feess, Eberhard, Wohlschlegel, Ansgar
Format: Article
Language:English
Subjects:
Banks
Compensation
Economics
Economics and Finance
Incentives
Industrial Organization
Microeconomics
Original Article
Public Finance
Risk taking
Citations: Items that this one cites
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We analyze the interplay of capital requirements and mandatory deferral of compensation in reducing banks’ risk taking incentives. Two heterogenous banks fund uncorrelated projects with fully diversifiable risk or correlated projects with systematic risk. One of both banks can identify project types and is superior at managing risks. If projects are in abundant supply, full mandatory deferral of compensation is optimal as it allows a larger banking sector without increasing the default risk. With limited supply of projects, deferred compensation may misallocate risky projects to the bank that is inferior at managing risks, so that early compensation may be optimal.
ISSN:0922-680X
1573-0468
DOI:10.1007/s11149-018-9352-3