Risk Managers in Banks

Matthias Efing, Patrick Kampkötter and Vincent Maurin

No 1388, HEC Research Papers Series from HEC Paris

Abstract: Some bank regulators warn that risk managers (RMs) will collude with banks' front offices (FOs) and rubberstamp investments if their bonuses depend on the performance of FOs. We show theoretically that positive pay correlation between FOs and RMs can instead be optimal. Based on data for German non-executive bank employees, we show empirically that performance pay is indeed positively correlated between RMs and FOs in practice. These pay correlations tend to be higher in banks with competent directors and in banks with stronger performance during the crisis of 2008, in line with our model predictions.

Keywords: risk management; governance; optimal contracts; pay-for-performance; risk-taking (search for similar items in EconPapers)
JEL-codes: G20 G21 J30 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2020-09-18
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Working Paper: Risk Managers in Banks (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1388

DOI: 10.2139/ssrn.3681255

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