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Bank Pay Caps, Bank Risk, and Macroprudential Regulation

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  • John Thanassoulis

Abstract

This 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 Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 636.

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Date of creation: 17 Dec 2012
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Handle: RePEc:oxf:wpaper:636

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Keywords: Remuneration; compensation; bonuses; capital conservation; systemic bank risk;

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References

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  1. Ing-Haw Cheng & Harrison Hong & Jose Scheinkman, 2010. "Yesterday’s Heroes: Compensation and Creative Risk-Taking," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
  2. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
  3. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers, University of Oxford, Department of Economics 532, University of Oxford, Department of Economics.
  4. Dean P. Foster & H. Peyton Young, 2010. "Gaming Performance Fees by Portfolio Managers," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(4), pages 1435-1458, November.
  5. Fabienne Llense, 2008. "French CEO Compensations: What is the Cost of a Mandatory Upper Limit?," CESifo Working Paper Series 2402, CESifo Group Munich.
  6. Alex Edmans & Xavier Gabaix, 2011. "The Effect of Risk on the CEO Market," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 24(8), pages 2822-2863.
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Cited by:
  1. 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, Hong Kong Institute for Monetary Research 182013, Hong Kong Institute for Monetary Research.

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