The Case For Intervening In Bankers' Pay
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.
|Date of creation:||01 Feb 2011|
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