What Does a Bank’s Payroll Reveal About its Risk-Taking?
Following the most recent financial crisis, extensive new regulations have been introduced to regulate bankers’ pay. Yet, very little is known about how bank-employee remuneration affects banks’ risk-taking, profitability, and financial-market stability.
Swiss Finance Institute Professor Harald Hau (UNIGE) and co-authors Matthias Efing (HEC Paris) and Patrick Kampkötter (University of Tübingen) reveal in the most recent edition of the International Banker Magazine that pay incentives can indeed be too high and may not even serve shareholder interests. However, optimal bonus size could also depend on bank-specific factors difficult to evaluate for any regulator. A one-size-fits-all solution for the bonus cap may easily lead to an excessively constraining framework that comes with its own social costs. Allowing shareholders to set higher bonus caps relies on the potentially incorrect assumption that bank owners pursue the same interests as regulators. In light of these dilemmas, bank capital regulation appears to be a much simpler and better path toward greater financial stability.
Interested to find out more? Read the International Banker Magazine article here.