Internal Reporting Systems, Compensation Contracts and Bank Regulation

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Internal Reporting Systems, Compensation Contracts and Bank Regulation

Author Info

Lóránth, Gyöngyi
Morrison, Alan

Abstract

We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. We show that origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of marginal projects financed by banks.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7179.

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Date of creation: Feb 2009
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Handle: RePEc:cpr:ceprdp:7179

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Find related papers by JEL classification:
G20 - Financial Economics - - Financial Institutions and Services - - - General
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G30 - Financial Economics - - Corporate Finance and Governance - - - General

This paper has been announced in the following NEP Reports:

NEP-ACC-2009-02-28 (Accounting & Auditing)
NEP-ALL-2009-02-28 (All new papers)
NEP-BAN-2009-02-28 (Banking)
NEP-BEC-2009-02-28 (Business Economics)
NEP-CTA-2009-02-28 (Contract Theory & Applications)
NEP-REG-2009-02-28 (Regulation)

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