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Controlling Bankers' Bonuses: Efficient Regulation Or Politics Of Envy?

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  • Kent Matthews
  • Owen Matthews

Abstract

The positive relationship between bank CEO compensation and risk‐taking is a well‐established empirical fact. The global banking crisis has resulted in a chorus of demands to control bankers' bonuses and thereby curtail their risk‐taking activities in the hope that the world can avoid a repeat in the future. However, the positive relationship is not a causative one. In this paper we argue that an implicit too‐big‐to‐fail policy provides the incentive for banks to take excessive risks and design compensation packages to deliver high returns. A credible no‐bailout policy will have a better chance of curbing excess risk‐taking than controlling bankers' compensation.

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  • Kent Matthews & Owen Matthews, 2010. "Controlling Bankers' Bonuses: Efficient Regulation Or Politics Of Envy?," Economic Affairs, Wiley Blackwell, vol. 30(1), pages 71-76, March.
    • Handle: RePEc:bla:ecaffa:v:30:y:2010:i:1:p:71-76
    DOI: 10.1111/j.1468-0270.2009.01977.x
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    More about this item

    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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