Incentive-based capital requirements

Christian Eufinger () and Andrej Gill

No 9 [rev.], SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper proposes a new regulatory approach that implements capital requirements contingent on executive incentive schemes. We argue that excessive risk-taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate governance failures within banks. The idea behind the proposed regulatory approach is thus that the more the compensation structure decouples the interests of bank managers from those of shareholders by curbing risk-taking incentives, the higher the leverage the bank is permitted to take on. Consequently, the risk-shifting incentives caused by government guarantees and the risk-mitigating incentives created by the compensation structure offset each other such that the manager chooses the socially efficient investment policy.

Keywords: Basel III; capital regulation; compensation; leverage; risk (search for similar items in EconPapers)
JEL-codes: G21 G28 G30 G32 G38 (search for similar items in EconPapers)
Date: 2016, Revised 2016
New Economics Papers: this item is included in nep-acc, nep-cba, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:9r

DOI: 10.2139/ssrn.1967492

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