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

40 Pages Posted: 19 Mar 2013 Last revised: 11 Nov 2013

Kevin J. Murphy

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

Multiple version iconThere are 2 versions of this paper

Date Written: April 25, 2013

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.

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

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

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: https://ssrn.com/abstract=2235395 or http://dx.doi.org/10.2139/ssrn.2235395

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)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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