Controlling Banker's Bonuses: Efficient Regulation or Politics of Envy?
AbstractThe positive relationship between bank CEO compensation and risk taking is a well established empirical fact. The global banking crisis has resulted in a chorus of demands to control banker's bonuses and thereby curtail their risk taking activities in the hope that the world can avoid a repeat in the future. However, the positive relationship is not a causative one. In this paper we argue that the cushioning of banks downside risks provide the incentive for banks to take excessive risk and design compensation packages to deliver high returns. Macro-prudential regulation will have a better chance of curbing excess risk taking than controlling banker's compensation.
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Bibliographic InfoPaper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2009/27.
Length: 21 pages
Date of creation: Dec 2009
Date of revision:
Publication status: Published in Economic Affairs , 30, 1, March, 2010, 71-76
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More information through EDIRC
Banker's bonus; risk taking; Too-big-to-Fail; macro-prudential regulation;
Other versions of this item:
- Kent Matthews & Owen Matthews, 2010. "Controlling Bankers' Bonuses: Efficient Regulation Or Politics Of Envy?," Economic Affairs, Wiley Blackwell, Wiley Blackwell, vol. 30(1), pages 71-76, 03.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-19 (All new papers)
- NEP-BAN-2009-12-19 (Banking)
- NEP-CTA-2009-12-19 (Contract Theory & Applications)
- NEP-REG-2009-12-19 (Regulation)
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