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Regulating Banking Bonuses in the European Union: A Case Study in Unintended Consequences


Kevin J. Murphy


University of Southern California - Marshall School of Business; University of Southern California - Department of Economics; USC Gould School of Law

April 25, 2013

USC CLEO Research Paper No. C13-8
USC Law Legal Studies Paper No. 13-8

Abstract:     
On 27 February 2013, the European Union (EU) reached a provisional deal to limit the amount of bankers’ bonuses to the amount of fixed remuneration (i.e., a one-to-one ratio); the cap could be increased to 2:1 with the backing of a supermajority of shareholders. I demonstrate that the pending EU regulations restrictions will: (1) increase rather than decrease incentives for excessive risk taking; (2) result in significant increase in fixed remuneration; (3) reduce incentives to create value; (4) reduce the competitiveness of the EU banking sector; and (5) result in a general degradation in the quality of EU investment bankers, thereby decreasing access to capital and increasing the cost of capital in the European Union.

Number of Pages in PDF File: 40

Keywords: Executive compensation, CEO pay, Banking Bonuses, Financial Crisis, Regulation, European Union

JEL Classification: G32, G34, G38, J33, M12, M52, N20

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Date posted: March 19, 2013 ; Last revised: November 11, 2013

Suggested Citation

Murphy, Kevin J., Regulating Banking Bonuses in the European Union: A Case Study in Unintended Consequences (April 25, 2013). USC CLEO Research Paper No. C13-8; USC Law Legal Studies Paper No. 13-8. Available at SSRN: http://ssrn.com/abstract=2235395 or http://dx.doi.org/10.2139/ssrn.2235395

Contact Information

Kevin J. Murphy (Contact Author)
University of Southern California - Marshall School of Business ( email )
BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

University of Southern California - Department of Economics
3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
USC Gould School of Law
699 Exposition Boulevard
Los Angeles, CA 90089
United States

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