Bank Pay Caps, Bank Risk, and Macroprudential Regulation
AbstractThis paper studies the consequences of a regulatory pay cap in proportion to assets onbank risk, bank value, and bank asset allocations. The cap is shown to lower banks' riskand raise banks' values by acting against a competitive externality in the labour market.The risk reduction is achieved without the possibility of reduced lending from a Tier 1increase. The cap encourages diversi cation and reduces the need a bank has to focus ona limited number of asset classes. The cap can be used for Macroprudential Regulationto encourage banks to move resources away from wholesale banking to the retail bankingsector. Such an intervention would be targeted: in 2009 a 20% reduction in remunerationwould have been equivalent to more than 150 basis points of extra tier 1 for UBS, forexample.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 636.
Date of creation: 17 Dec 2012
Date of revision:
Remuneration; compensation; bonuses; capital conservation; systemic bank risk;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- 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
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-03 (All new papers)
- NEP-BAN-2013-02-03 (Banking)
- NEP-CBA-2013-02-03 (Central Banking)
- NEP-RMG-2013-02-03 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gabaix, Xavier & Landier, Augustin, 2008.
"Why Has CEO Pay Increased So Much?,"
Open Access publications from University of Toulouse 1 Capitole
http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- Fabienne Llense, 2010.
"French CEOs' Compensations: What is the Cost of a Mandatory Upper Limit?,"
CESifo Economic Studies,
CESifo, vol. 56(2), pages 165-191, June.
- Fabienne Llense, 2008. "French CEO Compensations: What is the Cost of a Mandatory Upper Limit?," CESifo Working Paper Series 2402, CESifo Group Munich.
- John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
- Alex Edmans & Xavier Gabaix, 2011. "The Effect of Risk on the CEO Market," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2822-2863.
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