Basel III and CEO compensation in banks: a new regulatory attempt after the crisis : [March 27, 2012]

  • The paper analyzes the mutual influence of the capital structure and the investment decision of a bank, as well as the incentive effects of the bank executives compensation schemes on these decisions. In case the government implicitly or explicitly insures deposits and/or the banks debt, banks are incentivized to invest in risky assets and to have a high leverage. Capital regulation could potentially solve this excessive risk taking problem. However, this is only possible if the regulator can observe and properly measure the investment risks of the bank, which was called into question during the 2008-09 financial crisis. Hence, we propose a regulatory approach that is also able to implement the first best risk taking levels by the bank, but does not require the regulator to know the investment risk of the bank. The regulatory approach involves the implementation of capital requirements, which are made contingent on the management compensation.

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Author:Christian Eufinger, Andrej GillORCiDGND
Document Type:Report
Year of Completion:2012
Year of first Publication:2012
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2014/08/12
Tag:Basel III; capital regulation; compensation; leverage; risk
Issue:March 27, 2012
Page Number:23
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht