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

  • Marina Balboa

    ()

    (University of Alicante)

  • Germán López-Espinosa

    ()

    (University of Navarra)

  • Korok Ray

    ()

    (George Washington University)

  • Antonio Rubia

    ()

    (University of Alicante)

Registered author(s):

    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.

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    File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random50169a3d22927/1351005309_Compensations.pdf
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    Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 04/12.

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    Length: 36 pages
    Date of creation: 23 Oct 2012
    Date of revision:
    Handle: RePEc:una:unccee:wp0412
    Contact details of provider: Web page: http://www.unav.es/facultad/econom

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    1. A. Colin Cameron & Jonah B. Gelbach & Douglas L. Miller, 2011. "Robust Inference With Multiway Clustering," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(2), pages 238-249, April.
    2. 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.
    3. Jonah B. Gelbach & Doug Miller, 2009. "Robust Inference with Multi-way Clustering," Working Papers 99, University of California, Davis, Department of Economics.
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