Bankers' pay and excessive risk

John Thanassoulis and Misa Tanaka

No 558, Bank of England working papers from Bank of England

Abstract: This paper studies the agency problem between bank management, shareholders, and the taxpayer. Executive bonuses increase in the probability the bank is too big to fail. Bank management recognise it is very likely optimal to select risky projects which exploit the taxpayer, implying project selection effort (eg due diligence) is more expensive to incentivise. This agency problem leads to too much risk for society, not for shareholders. Compensation rules aimed at solving management-shareholder agency problems — equity pay, deferred, including debt — do not correct the excessive risk taking. By contrast, malus and clawbacks can incentivise the bank management to make better risk choices.

Keywords: Executive compensation; bankers bonuses; risk-taking; financial regulation; return on equity; clawback; deferral (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 G38 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2015-10-14
New Economics Papers: this item is included in nep-ban, nep-cta, nep-hrm and nep-rmg
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:boe:boeewp:0558

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