Executive Compensation and Systemic Risk: The Role of Non-Interest Income and Wholesale Funding

Marina Balboa (), Germán López-Espinosa (), Korok Ray () and Antonio Rubia ()
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Marina Balboa: Department of Financial Economics, University of Alicante
Germán López-Espinosa: School of Economics and Business Administration, University of Navarra
Korok Ray: School of Business, George Washington University
Antonio Rubia: Department of Financial Economics, University of Alicante

No 04/12, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

Abstract: This paper analyzes whether the excessive overreliance on non-interest income and wholesale funding, which occurred in the banking industry during the last two decades and led to increases in systemic risk, could arise from the desire of bank managers to increase their variable compensation. Using a sample of U.S. bank holding companies during 1995 to 2010, our results show that non-interest income is positively associated to a larger proportion of variable compensation. Also, while exercised options are more sensitive to income trading activities, bonuses tend to be related to the revenues originated from investment banking and venture capital activities. Similarly, a greater reliance on short-term wholesale funding positively associates with higher levels of variable compensation and bonuses. After the financial crisis, variable compensation and bonuses increased with non-interest income, but decreased with the use of short-term wholesale funding.

Keywords: Non-interest income; executive compensations; financial crisis; wholesale funding (search for similar items in EconPapers)
JEL-codes: C30 G01 G20 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2012-10-03
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:una:unccee:wp0412

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