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

Listed author(s):
  • Marina Balboa


    (Department of Financial Economics, University of Alicante)

  • Germán López-Espinosa


    (School of Economics and Business Administration, University of Navarra)

  • Korok Ray


    (School of Business, George Washington University)

  • Antonio Rubia


    (Department of Financial Economics, 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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    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: 03 Oct 2012
    Handle: RePEc:una:unccee:wp0412
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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. 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.
    3. 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.
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