Securitization and Compensation in Financial Institutions

Roman Inderst and Sebastian Pfeil

No 8089, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze the interaction between financial institutions' internal compensation policy, the quality of loans, and their securitization decision. We also assess the case for requiring financial institutions to defer bonus pay so as to make incentives more commensurate with the longer-term risk of their transactions. While mandatory deferred compensation can improve the quality of loans, we also show when it has the opposite effect. We further analyze when mandatory deferred compensation can complement a policy that requires financial institutions to retain a minimum exposure to their originated loans, and we discuss the impact of a tax on short-term bonus pay. Generally, our modeling framework allows us to study the interaction of financial institutions' internal agency problems with the external agency problem that arises from securitization.

Keywords: Compensation; Regulation; Securitization (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2010-11
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Citations: View citations in EconPapers (5)

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Journal Article: Securitization and Compensation in Financial Institutions (2013)
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