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Executive Compensation and Systemic Risk: The Role of Non-Interest Income and Wholesale Funding

Author

Listed:
  • Marina Balboa

    (University of Alicante)

  • Germán López-Espinosa

    (University of Navarra)

  • Korok Ray

    (George Washington University)

  • Antonio Rubia

    (University of Alicante)

Abstract

This paper analyzes whether the excessive overreliance on non-interest income and wholesale funding, which occurred in the banking industry during the last two decades and led to increases in systemic risk, could arise from the desire of bank managers to increase their variable compensation. Using a sample of U.S. bank holding companies during 1995 to 2010, our results show that non-interest income is positively associated to a larger proportion of variable compensation. Also, while exercised options are more sensitive to income trading activities, bonuses tend to be related to the revenues originated from investment banking and venture capital activities. Similarly, a greater reliance on short-term wholesale funding positively associates with higher levels of variable compensation and bonuses. After the financial crisis, variable compensation and bonuses increased with non-interest income, but decreased with the use of short-term wholesale funding.

Suggested Citation

  • Marina Balboa & Germán López-Espinosa & Korok Ray & Antonio Rubia, 2012. "Executive Compensation and Systemic Risk: The Role of Non-Interest Income and Wholesale Funding," Faculty Working Papers 04/12, School of Economics and Business Administration, University of Navarra.
    • Handle: RePEc:una:unccee:wp0412
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    References listed on IDEAS

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    Cited by:

    1. zhang, zhichao & Xie, Li & lu, xiangyun & zhang, zhuang, 2014. "Determinants of financial distress in u.s. large bank holding companies," MPRA Paper 53545, University Library of Munich, Germany.
    2. Jeong-Bon Kim & Li Li & Mary L. Z. Ma & Frank M. Song, 2013. "CEO Option Compensation, Risk-Taking Incentives, and Systemic Risk in the Banking Industry," Working Papers 182013, Hong Kong Institute for Monetary Research.
    3. Jeong-Bon Kim & Li Li & Mary L. Z. Ma & Frank M. Song, 2016. "CEO option compensation and systemic risk in the banking industry," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 23(2), pages 131-160, June.

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    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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