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Securitization and Compensation in Financial Institutions

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  • Inderst, Roman
  • Pfeil, Sebastian

Abstract

We analyze the interaction between financial institutions' internal compensation policy, the quality of loans, and their securitization decision. We also assess the case for requiring financial institutions to defer bonus pay so as to make incentives more commensurate with the longer-term risk of their transactions. While mandatory deferred compensation can improve the quality of loans, we also show when it has the opposite effect. We further analyze when mandatory deferred compensation can complement a policy that requires financial institutions to retain a minimum exposure to their originated loans, and we discuss the impact of a tax on short-term bonus pay. Generally, our modeling framework allows us to study the interaction of financial institutions' internal agency problems with the external agency problem that arises from securitization.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8089.

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Date of creation: Nov 2010
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Handle: RePEc:cpr:ceprdp:8089

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Keywords: Compensation; Regulation; Securitization;

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References

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Citations

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Cited by:
  1. Riachi, Ilham & Schwienbacher, Armin, 2013. "Securitization of corporate assets and executive compensation," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 235-251.
  2. Pagès, Henri, 2013. "Bank monitoring incentives and optimal ABS," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 30-54.
  3. Colonnello, Stefano & Curatola, Giuliano & Ngoc Giang Hoang, 2014. "Executive compensation structure and credit spreads," SAFE Working Paper Series 60, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  4. Jeong-Bon Kim & Li Li & Mary L. Z. Ma & Frank M. Song, 2013. "CEO Option Compensation, Risk-Taking Incentives, and Systemic Risk in the Banking Industry," Working Papers 182013, Hong Kong Institute for Monetary Research.

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