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The Case For Intervening In Bankers' Pay

  • John Thanassoulis

This paper studies banker remuneration in a competitive market for banker talent.� I model, and then calibrate, the default risk of the banks generated by investments and remuneration pressures.� Competing banks prefer to pay their banking staff in bonuses and not in wages as risk sharing on the remuneration bill is valuable.� But competition for bankers generates a negative externality driving up rival banks' default risk.� Optimal financial regulation involves an appropriately structured limit on the proportion of the balance sheet used for bonuses.� However stringent bonus caps are value destroying, default risk enhancing and cannot be optimal for regulators who control only a small number of banks.� The paper allows an assessment of the intellectual arguments behind widespread calls to regulate the pay of bankers.� The paper uses US data to calibrate the analysis and demonstrate the significant contribution of remuneration to default risk.

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File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper532.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 532.

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Date of creation: 01 Feb 2011
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Handle: RePEc:oxf:wpaper:532
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Web page: http://www.economics.ox.ac.uk/
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  1. Jens Carsten Jackwerth., 1996. "Recovering Risk Aversion from Option Prices and Realized Returns," Research Program in Finance Working Papers RPF-265, University of California at Berkeley.
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  10. Boone, Jan, 2000. "Competition," CEPR Discussion Papers 2636, C.E.P.R. Discussion Papers.
  11. Alex Edmans & Qi Liu, 2011. "Inside Debt," Review of Finance, European Finance Association, vol. 15(1), pages 75-102.
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