Inside Debt, Bank Default Risk and Performance during the Crisis

FDIC Center for Financial Research Working Paper No. 2012-3

54 Pages Posted: 3 Aug 2012 Last revised: 14 Sep 2014

See all articles by Rosalind L. Bennett

Rosalind L. Bennett

FDIC, Division of Insurance and Research

Levent Guntay

Federal Deposit Insurance Corporation (FDIC)

Haluk Unal

University of Maryland - Robert H. Smith School of Business

Date Written: February 2014

Abstract

In this paper, we examine whether the structure of the chief executive officer’s (CEO) compensation package can explain default risk and performance in bank holding companies (BHCs) during the recent credit crisis. Using a sample of 371 BHCs, we show that in 2006 lower holdings of inside debt relative to equity by a CEO has an association with higher default risk and worse performance during the crisis period. We also show that inside debt is a better signal of the BHCs’ performance and default risk than inside equity measures. Finally, we provide evidence that supervisors issued favorable ratings to the lead bank in BHCs that paid their CEOs relatively higher inside debt.

Keywords: Executive compensation, financial crises, bank risk

JEL Classification: G01, G21, G28, G32

Suggested Citation

Bennett, Rosalind L. and Guntay, Levent and Unal, Haluk, Inside Debt, Bank Default Risk and Performance during the Crisis (February 2014). FDIC Center for Financial Research Working Paper No. 2012-3 . Available at SSRN: https://ssrn.com/abstract=2122619 or http://dx.doi.org/10.2139/ssrn.2122619

Rosalind L. Bennett (Contact Author)

FDIC, Division of Insurance and Research ( email )

550 Seventeenth Street, NW
Washington, DC 20057
United States
202-898-7160 (Phone)

Levent Guntay

Federal Deposit Insurance Corporation (FDIC) ( email )

550 17th Street NW
Washington, DC 20429
United States
202-8986819 (Phone)

Haluk Unal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2256 (Phone)
301-405 0359 (Fax)

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