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Internal Reporting Systems, Compensation Contracts, and Bank Regulation

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  • Loranth, Gyongyi
  • Morrison, Alan

Abstract

We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. We show that origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of marginal projects financed by banks.

Suggested Citation

  • Loranth, Gyongyi & Morrison, Alan, 2009. "Internal Reporting Systems, Compensation Contracts, and Bank Regulation," CEPR Discussion Papers 7155, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7155
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    References listed on IDEAS

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    Cited by:

    1. Alan D. Morrison, 2010. "Knowledge Codification, Institutions And Financial Markets," Manchester School, University of Manchester, vol. 78(s1), pages 1-24, September.
    2. Norvald INSTEFJORD & NAKATA Hiroyuki, 2015. "Loan Monitoring and Bank Risk," Discussion papers 15121, Research Institute of Economy, Trade and Industry (RIETI).

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