TY  - UNPD
A1  - Aptus, Elias
A1  - Britz, Volker
A1  - Gersbach, Hans
T1  - On the economics of crisis contracts
T2  - Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 453
N2  - We examine the impact of so-called "Crisis Contracts" on bank managers' risk-taking incentives and on the probability of banking crises. Under a Crisis Contract, managers are required to contribute a pre-specified share of their past earnings to finance public rescue funds when a crisis occurs. This can be viewed as a retroactive tax that is levied only when a crisis occurs and that leads to a form of collective liability for bank managers. We develop a game-theoretic model of a banking sector whose shareholders have limited liability, so that society at large will suffer losses if a crisis occurs. Without Crisis Contracts, the managers' and shareholders' interests are aligned, and managers take more than the socially optimal level of risk. We investigate how the introduction of Crisis Contracts changes the equilibrium level of risk-taking and the remuneration of bank managers. We establish conditions under which the introduction of Crisis Contracts will reduce the probability of a banking crisis and improve social welfare. We explore how Crisis Contracts and capital requirements can supplement each other and we show that the efficacy of Crisis Contracts is not undermined by attempts to hedge.
T3  - CFS working paper series - 453 
KW  - Banking crisis
KW  - Crisis contracts
KW  - Excessive risk taking
KW  - Banker's pay
KW  - Hedging
KW  - Capital requirements
Y1  - 2014
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/33830
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-338301
UR  - https://www.ifk-cfs.de/2385.html
PB  - Center for Financial Studies
CY  - Frankfurt, M.
ER  -