Bank pay caps, bank risk, and macroprudential regulation

John Thanassoulis

Journal of Banking & Finance, 2014, vol. 48, issue C, 139-151

Abstract: This paper studies the consequences of a regulatory pay cap in proportion to assets on bank risk, bank value, and bank asset allocations. The cap is shown to lower banks’ risk and raise banks’ values by acting against a competitive externality in the labour market. The risk reduction is achieved without the possibility of reduced lending from a Tier 1 increase. The cap encourages diversification and reduces the need a bank has to focus on a limited number of asset classes. The cap can be used for Macroprudential Regulation to encourage banks to move resources away from wholesale banking to the retail banking sector. Such an intervention would be targeted: in 2009 a 20% reduction in remuneration would have been equivalent to more than 150 basis points of extra Tier 1 for UBS, for example.

Keywords: Bank regulation; Financial stability; Bankers’ pay; Bonus caps; Capital conservation buffer (search for similar items in EconPapers)
JEL-codes: G01 G21 G38 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Working Paper: Bank Pay Caps, Bank Risk, and Macroprudential Regulation (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:48:y:2014:i:c:p:139-151

DOI: 10.1016/j.jbankfin.2014.04.004

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