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Competition, Bonuses, and Risk-taking in the Banking Industry

Author

Listed:
  • Christina E. Bannier
  • Eberhard Feess
  • Natalie Packham

Abstract

Remuneration systems in the banking industry, in particular bonus payments, have frequently been blamed for contributing to the buildup of risks leading to the recent financial crisis. In our model, banks compete for managerial talent that is private information. Competition for talent sets incentives to offer bonuses inducing risk-taking that is excessive not only from society's perspective but also from the viewpoint of the banks themselves. In fact, bonus payments and excessive risk-taking are increasing with competition. Thus, our model offers a rationale why bonuses are paid even when reducing the expected profits of banks. Copyright 2013, Oxford University Press.

Suggested Citation

  • Christina E. Bannier & Eberhard Feess & Natalie Packham, 2013. "Competition, Bonuses, and Risk-taking in the Banking Industry," Review of Finance, European Finance Association, vol. 17(2), pages 653-690.
  • Handle: RePEc:oup:revfin:v:17:y:2013:i:2:p:653-690
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    File URL: http://hdl.handle.net/10.1093/rof/rfs002
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    Citations

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    Cited by:

    1. Vithessonthi, Chaiporn & Tongurai, Jittima, 2016. "Financial markets development, business cycles, and bank risk in South America," Research in International Business and Finance, Elsevier, vol. 36(C), pages 472-484.
    2. Thanassoulis, John, 2014. "Bank pay caps, bank risk, and macroprudential regulation," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 139-151.
    3. Axel Wieneke, 2016. "Better Financial Innovation via Innovative Finance of Supervisors," Economic Papers, The Economic Society of Australia, vol. 35(1), pages 16-23, March.
    4. Gietl, Daniel, 2018. "Overconfidence and Bailouts," Rationality and Competition Discussion Paper Series 132, CRC TRR 190 Rationality and Competition.
    5. Hendrik Hakenes & Isabel Schnabel, 2014. "Bank Bonuses and Bailouts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 259-288, February.
    6. Bannier, Christina E. & Feess, Eberhard & Packham, Natalie, 2014. "Incentive schemes, private information and the double-edged role of competition for agents," CFS Working Paper Series 475, Center for Financial Studies (CFS).
    7. repec:eee:eecrev:v:110:y:2018:i:c:p:41-60 is not listed on IDEAS
    8. Carlos O. Arteta & Mark S. Carey & Ricardo Correa & Jason Kotter, 2008. "Which banks sponsored ABCP vehicles and why?," Proceedings 1072, Federal Reserve Bank of Chicago.
    9. Efing, Matthias & Hau, Harald & Kampkötter, Patrick & Steinbrecher, Johannes, 2015. "Incentive pay and bank risk-taking: Evidence from Austrian, German, and Swiss banks," Journal of International Economics, Elsevier, vol. 96(S1), pages 123-140.
    10. repec:kap:regeco:v:53:y:2018:i:2:d:10.1007_s11149-018-9352-3 is not listed on IDEAS
    11. Wall, Larry D., 2019. "Is Stricter Regulation of Incentive Compensation the Missing Piece?," FRB Atlanta Working Paper 2019-6, Federal Reserve Bank of Atlanta.
    12. Chaiporn Vithessonthi, 2016. "The Consequences of Bank Loan Growth: Evidence from Asia," PIER Discussion Papers 19., Puey Ungphakorn Institute for Economic Research, revised Feb 2016.
    13. Woon Sau Leung & Wei Song & Jie Chen, 2018. "Does Bank Stakeholder Orientation Enhance Financial Stability? Evidence from a Natural Experiment," Working Papers 2018-14, Swansea University, School of Management.
    14. repec:eee:riibaf:v:42:y:2017:i:c:p:1489-1503 is not listed on IDEAS
    15. Gietl, Daniel & Haufler, Andreas, 2018. "Bonus taxes and international competition for bank managers," European Economic Review, Elsevier, vol. 110(C), pages 41-60.
    16. Eberhard Feess & Ansgar Wohlschlegel, 2018. "Bank capital requirements and mandatory deferral of compensation," Journal of Regulatory Economics, Springer, vol. 53(2), pages 206-242, April.

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