Bank Herding and Incentive Systems as Catalysts for the Financial Crisis

IUP Journal of Behavioral Finance, Vol. 7, Nos. 1 & 2, pp. 30-58, 2010

Posted: 10 Feb 2011

See all articles by Peter R. Haiss

Peter R. Haiss

WU Vienna University of Economics and Business; UniCredit Bank Austria; IES Vienna - Institute for the International Education of Students

Multiple version iconThere are 2 versions of this paper

Date Written: June 7, 2010

Abstract

Why do good bankers at times respond unanimously with the same disastrous strategy? Rooted in regulatory economics and behavioural finance, the paper offers a taxonomy of effects that narrow banks decision scope into funnel-shaped and thus prepared the ground for the financial crisis. The basic message of the paper is that inconsistent decision rules, too rigid bank regulation, stakeholder-shaped incentive structures within banks and uncritical adoption of innovations may force banks into decisions that are micro-functional but macro-dysfunctional. Behavioral aspects play a key role in the suggest remedies on the regulatory side (macroprudential regulation, supervision of incentives) and on the banking side (proper reward systems and structured decision making) to re-establish prudent banking.

Keywords: financial crisis, behavioral finance, bank regulation, incentives

JEL Classification: D03, D71, K23, G21, L51, M12, M52, P16

Suggested Citation

Haiss, Peter R., Bank Herding and Incentive Systems as Catalysts for the Financial Crisis (June 7, 2010). IUP Journal of Behavioral Finance, Vol. 7, Nos. 1 & 2, pp. 30-58, 2010, Available at SSRN: https://ssrn.com/abstract=1756763

Peter R. Haiss (Contact Author)

WU Vienna University of Economics and Business ( email )

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