Securitization and Compensation in Financial Institutions

EFA 2011 Stockholm Meetings Paper

60 Pages Posted: 12 Oct 2010 Last revised: 24 Jan 2014

See all articles by Roman Inderst

Roman Inderst

Goethe University Frankfurt

Sebastian Pfeil

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)

Multiple version iconThere are 2 versions of this paper

Date Written: July 17, 2011

Abstract

We analyze the interaction between financial institutions' internal compensation policy, the quality of loans, and their securitization decision. We also assess the case for requiring financial institutions to defer bonus pay so as to make incentives more commensurate with the longer-term risk of their transactions. While mandatory deferred compensation can improve the quality of loans, we also show when it has the opposite effect. We further analyze when mandatory deferred compensation can complement a policy that requires financial institutions to retain a minimum exposure to their originated loans, and we discuss the impact of a tax on short-term bonus pay. Generally, our modeling framework allows us to study the interaction of financial institutions' internal agency problems with the external agency problem that arises from securitization.

JEL Classification: G21, G28

Suggested Citation

Inderst, Roman and Pfeil, Sebastian, Securitization and Compensation in Financial Institutions (July 17, 2011). EFA 2011 Stockholm Meetings Paper . Available at SSRN: https://ssrn.com/abstract=1690742 or http://dx.doi.org/10.2139/ssrn.1690742

Roman Inderst

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60629
Germany
+49 (69) 798-34601 (Phone)
+49 (69) 798-35000 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/en/departments/finance/lehrstuhl/prof-dr-roman-inderst/team

Sebastian Pfeil (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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