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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
Contact details of provider: Postal: Manor Rd. Building, Oxford, OX1 3UQ
Web page: http://www.economics.ox.ac.uk/
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  1. Fabienne Llense, 2010. "French CEOs' Compensations: What is the Cost of a Mandatory Upper Limit?," CESifo Economic Studies, CESifo, vol. 56(2), pages 165-191, June.
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  6. repec:dgr:kubcen:200671 is not listed on IDEAS
  7. 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.
  8. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
  9. Boone, J., 2000. "Competition," Discussion Paper 2000-104, Tilburg University, Center for Economic Research.
  10. Alan D. Morrison & William J. Wilhelm, 2004. "The Demise of Investment-Banking Partnerships: Theory and Evidence," OFRC Working Papers Series 2004fe14, Oxford Financial Research Centre.
  11. Nocke, Volker & Thanassoulis, John, 2010. "Vertical Relations under Credit Constraints," CEPR Discussion Papers 7636, C.E.P.R. Discussion Papers.
  12. Alex Edmans & Xavier Gabaix & Augustin Landier, 2009. "A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 4881-4917, December.
  13. Patrick Bolton & Hamid Mehran & Joel Shapiro, 2010. "Executive compensation and risk taking," Staff Reports 456, Federal Reserve Bank of New York.
  14. Zoltan Pozsar & Tobias Adrian & Adam Ashcraft & Hayley Boesky, 2010. "Shadow banking," Staff Reports 458, Federal Reserve Bank of New York.
  15. Dittmann, Ingolf & Maug, Ernst & Zhang, Dan, 2011. "Restricting CEO pay," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1200-1220, September.
  16. repec:dgr:kubcen:2012008 is not listed on IDEAS
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