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Bank Bonuses and Bail-outs

  • Hakenes, Hendrik
  • Schnabel, Isabel

This paper shows that bonus contracts may arise endogenously as a response to agency problems within banks, and analyzes how compensation schemes change in reaction to anticipated bail-outs. If there is a risk-shifting problem, bail-out expectations lead to steeper bonus schemes and even more risk-taking. If there is an effort problem, the compensation scheme becomes flatter and effort decreases. If both types of agency problems are present, a sufficiently large increase in bail-out perceptions makes it optimal for a welfare-maximizing regulator to impose caps on bank bonuses. In contrast, raising managers’ liability is counterproductive.

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File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=8852
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8852.

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Date of creation: Feb 2012
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Handle: RePEc:cpr:ceprdp:8852
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  1. Gropp, Reint & Köhler, Matthias, 2010. "Bank owners or bank managers: who is keen on risk? Evidence from the financial crisis," ZEW Discussion Papers 10-013, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Reint Gropp & Hendrik Hakenes & Isabel Schnabel, 2010. "Competition, Risk-Shifting,and Public Bail-out Policies," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_05, Max Planck Institute for Research on Collective Goods.
  3. 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.
  4. Bruno Biais & Catherine Casamatta, 1999. "Optimal Leverage and Aggregate Investment," Journal of Finance, American Finance Association, vol. 54(4), pages 1291-1323, 08.
  5. 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.
  6. John, Kose & Mehran, Hamid & Qian, Yiming, 2010. "Outside monitoring and CEO compensation in the banking industry," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 383-399, September.
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