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Bank risk-taking and misconduct

Author

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  • Ieva Sakalauskaite

    (University of Amsterdam)

Abstract

This paper studies bank misconduct using a novel dataset on malpractice that resulted in conduct costs in a sample of 30 financial institutions during 2000-2016. It shows that misconduct has been prevalent over the sample period and that its intensity varies over the business cycle. Furthermore, the initiation of misconduct is related to bank remuneration schemes, increasing with CEO bonuses in periods of high economic growth and when bank leverage is high. To provide a possible explanation for the observed dynamics, the paper builds a theoretical model in which misconduct is linked to bank risk-taking. There, the implementation of profitable but risky projects requires more aggressive pay structures, in turn increasing managers’ incentives to engage in other activities that boost short-term returns. The findings have implications for regulation aimed at preventing malpractice in financial institutions.

Suggested Citation

  • Ieva Sakalauskaite, 2018. "Bank risk-taking and misconduct," Bank of Lithuania Working Paper Series 53, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:53
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    More about this item

    Keywords

    Banks; Misconduct; Bonuses; Supervision;
    All these keywords.

    JEL classification:

    • 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

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