IDEAS home Printed from https://ideas.repec.org/p/una/unccee/wp0412.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random50169a3d22927/1351005309_Compensations.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Stiroh, Kevin J. & Rumble, Adrienne, 2006. "The dark side of diversification: The case of US financial holding companies," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2131-2161, August.
    2. DeYoung, Robert & Roland, Karin P., 2001. "Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model," Journal of Financial Intermediation, Elsevier, vol. 10(1), pages 54-84, January.
    3. Cameron, A. Colin & Gelbach, Jonah B. & Miller, Douglas L., 2011. "Robust Inference With Multiway Clustering," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(2), pages 238-249.
    4. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    5. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    6. Houston, Joel F. & James, Christopher, 1995. "CEO compensation and bank risk Is compensation in banking structured to promote risk taking?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 405-431, November.
    7. Livne, Gilad & Markarian, Garen & Milne, Alistair, 2011. "Bankers' compensation and fair value accounting," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1096-1115, September.
    8. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. 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.
    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kim, Hakkon & Batten, Jonathan A. & Ryu, Doojin, 2020. "Financial crisis, bank diversification, and financial stability: OECD countries," International Review of Economics & Finance, Elsevier, vol. 65(C), pages 94-104.
    2. Abedifar, Pejman & Molyneux, Philip & Tarazi, Amine, 2018. "Non-interest income and bank lending," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 411-426.
    3. Holod, Dmytro & Kitsul, Yuriy & Torna, Gökhan, 2020. "Market risk-based capital requirements, trading activity, and bank risk," Journal of Banking & Finance, Elsevier, vol. 112(C).
    4. Haq, Mamiza & Faff, Robert & Seth, Rama & Mohanty, Sunil, 2014. "Disciplinary tools and bank risk exposure," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 37-64.
    5. Dung V. Tran & M. Kabir Hassan & Isabelle Girerd‐Potin & Pascal Louvet, 2020. "Activity Strategies, Agency Problems, And Bank Risk," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(3), pages 575-613, August.
    6. De Jonghe, Olivier, 2010. "Back to the basics in banking? A micro-analysis of banking system stability," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 387-417, July.
    7. Benoît D'Udekem, 2014. "Bank Cash Holdings and Investor Uncertainty," Working Papers CEB 14-002, ULB -- Universite Libre de Bruxelles.
    8. English, William B. & Van den Heuvel, Skander J. & Zakrajšek, Egon, 2018. "Interest rate risk and bank equity valuations," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 80-97.
    9. Minzhi Wu & Emili Tortosa-Ausina, 2020. "Bank Diversification and Focus in Disruptive Times: China, 2007–2018," Working Papers 2020/21, Economics Department, Universitat Jaume I, Castellón (Spain).
    10. Tran, Dung Viet & Hassan, M. Kabir & AlTalafha, Sarah H. & Turunen-Red, Arja, 2021. "Policy uncertainty, the use of derivatives: Evidence from U.S. bank holdingcompanies (BHCs)," Research in International Business and Finance, Elsevier, vol. 58(C).
    11. Carl R. Chen & Ying Sophie Huang & Ting Zhang, 2017. "Non-interest Income, Trading, and Bank Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(1), pages 19-53, February.
    12. Riccardo Ferretti & Giovanni Gallo & Andrea Landi & Valeria Venturelli, 2018. "Market-Book Ratios of European Banks: What Does Explain the Structural Fall?," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0065, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    13. Ozili, Peterson K, 2019. "Bank Earnings Management using Commission and Fee Income: the Role of Investor Protection and Economic Fluctuation," MPRA Paper 101824, University Library of Munich, Germany.
    14. Hou, Xiaohui & Wang, Bo & Lian, Jiale & Li, Wanli, 2021. "Bank executive pay limits and discretionary loan loss provisions: Evidence from China," Research in International Business and Finance, Elsevier, vol. 58(C).
    15. Riccardo Ferretti & Giovanni Gallo & Andrea Landi & Valeria Venturelli, 2018. "Market-Book Ratios of European Banks: What Does Explain the Structural Fall?," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 18011, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    16. De Jonghe, Olivier, 2010. "Back to the basics in banking? A micro-analysis of banking system stability," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 387-417, July.
    17. Claudia Buch & Catherine Koch & Michael Koetter, 2016. "Crises and rescues: liquidity transmission through international banks," BIS Working Papers 576, Bank for International Settlements.
    18. Yue Zhao & Difang Wan, 2018. "Institutional high frequency trading and price discovery: Evidence from an emerging commodity futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(2), pages 243-270, February.
    19. Lee, Chien-Chiang & Yang, Shih-Jui & Chang, Chi-Hung, 2014. "Non-interest income, profitability, and risk in banking industry: A cross-country analysis," The North American Journal of Economics and Finance, Elsevier, vol. 27(C), pages 48-67.
    20. Nadia Saghi-Zedek, 2016. "Product diversification and bank performance: does ownership structure matter?," Post-Print halshs-01342528, HAL.

    More about this item

    Keywords

    Non-interest income; executive compensation; financial crisis; wholesale funding;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:una:unccee:wp0412. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: http://www.unav.edu/web/facultad-de-ciencias-economicas-y-empresariales .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.