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Bank risk management, regulation and CEO compensation after the Panic of 2008

William C Handorf

Journal of Banking Regulation, 2015, vol. 16, issue 1, 39-50

Abstract: Banking law and regulation have prescribed new rules applicable to executive compensation policy for US and European banks since the Panic of 2008, given evidence that selected institutions relied on incentive compensation plans that encouraged and rewarded excessive risk-taking. We evaluate a sample of regional US bank compensation practices before and after the crisis to provide a preliminary empirical analysis how bank boards have reacted to emerging compensation rules. More risky banks appear to have rewarded management more generously before and during the financial crisis. Banks subsequently modified compensation plans by providing CEOs opportunities to earn more if their institution is highly capitalized and loan portfolios are low-risk. The shift in compensation strategy has benefitted shareholders; conservatively managed regional banks have paid higher dividends and offer investors more share value appreciation.

Date: 2015
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Handle: RePEc:pal:jbkreg:v:16:y:2015:i:1:p:39-50