Regulatory Constraints on Performance-Based Managerial Compensation, Bank Monitoring, and Aggregate Loan Quality
This paper evaluates the effects of binding regulatory restraints on the rate of performance-based management compensation within a banking framework in which a primary function of bank management teams is to monitor loans in order to eliminate deadweight default losses. Available management teams are endowed with heterogeneous levels of monitoring efficiencies, and obtaining services from more efficient monitoring teams requires payment of higher rates of performance-based compensation. In equilibrium, a fraction of banks choose to employ management teams that monitor. With or without binding capital requirements, imposing binding restraints on the allowed rate of performance-based compensation results either in lower bank efficiency or in a reduced fraction of monitoring banks and, hence, lower aggregate loan quality. Copyright International Atlantic Economic Society 2011
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Volume (Year): 39 (2011)
Issue (Month): 4 (December)
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"A Theory of Bank Regulation and Management Compensation,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
98-043, New York University, Leonard N. Stern School of Business-.
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- Jonathan R. Macey & Maureen O'Hara, 2003. "The corporate governance of banks," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 91-107.
- Elyasiani, Elyas & Kopecky, Kenneth J & VanHoose, David, 1995. "Costs of Adjustment, Portfolio Separation, and the Dynamic Behavior of Bank Loans and Deposits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 955-74, November.
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