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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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  1. Nocke, Volker & Thanassoulis, John, 2010. "Vertical Relations under Credit Constraints," CEPR Discussion Papers 7636, C.E.P.R. Discussion Papers.
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  15. Erzo G. J. Luttmer, 2007. "Selection, Growth, and the Size Distribution of Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 122(3), pages 1103-1144.
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