Internal Reporting Systems, Compensation Contracts and Bank Regulation

Alan Morrison and Lóránth, Gyöngyi

No 7179, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. We show that origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of marginal projects financed by banks.

Keywords: Compensation; Internal reporting system; Capital regulation (search for similar items in EconPapers)
JEL-codes: G20 G21 G30 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-acc, nep-ban, nep-bec, nep-cta and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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