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Bank capital requirements and mandatory deferral of compensation

Eberhard Feess and Ansgar Wohlschlegel ()
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Eberhard Feess: Victoria University of Wellington

Journal of Regulatory Economics, 2018, vol. 53, issue 2, 206-242

Abstract: Abstract 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.

Keywords: Bank regulation; Capital requirements; Mandatory deferral of compensation (search for similar items in EconPapers)
JEL-codes: G21 G28 D62 J33 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Bank Capital Requirements and Mandatory Deferral of Compensation (2014) Downloads
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Handle: RePEc:kap:regeco:v:53:y:2018:i:2:d:10.1007_s11149-018-9352-3