Internal Reporting Systems, Compensation Contracts, and Bank Regulation
Centre for Economic Policy Research (CEPR)
Alan D. Morrison
University of Oxford - Said Business School; University of Oxford - Merton College
CEPR Discussion Paper No. DP7155
We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. We show that origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of marginal projects financed by banks.
Number of Pages in PDF File: 45working papers series
Date posted: February 18, 2009
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