Bank Pay Caps, Bank Risk, and Macroprudential Regulation

33 Pages Posted: 15 Jun 2013 Last revised: 26 Dec 2019

See all articles by John E. Thanassoulis

John E. Thanassoulis

University of Warwick - Warwick Business School; UK Competition and Markets Authority; Oxford-Man Institute, University of Oxford

Date Written: December 13, 2013

Abstract

This paper studies the consequences of a regulatory pay cap in proportion to assets on bank risk, bank value, and bank asset allocations. The cap is shown to lower banks' risk and raise banks' values by acting against a competitive externality in the labour market. The risk reduction is achieved without the possibility of reduced lending from a Tier 1 increase. The cap encourages diversification and reduces the need a bank has to focus on a limited number of asset classes. The cap can be used for Macroprudential Regulation to encourage banks to move resources away from wholesale banking to the retail banking sector. Such an intervention would be targeted: in 2009 a 20% reduction in remuneration would have been equivalent to more than 150 basis points of extra Tier 1 for UBS, for example.

Keywords: Bank regulation, financial stability, bankers' pay, bonus caps, Capital Conservation Buffer

JEL Classification: G01, G21, G38

Suggested Citation

Thanassoulis, John E., Bank Pay Caps, Bank Risk, and Macroprudential Regulation (December 13, 2013). Journal of Banking and Finance, Forthcoming, WBS Finance Group Research Paper No. 205, Available at SSRN: https://ssrn.com/abstract=2278895 or http://dx.doi.org/10.2139/ssrn.2278895

John E. Thanassoulis (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://https://sites.google.com/site/thanassoulis/

UK Competition and Markets Authority ( email )

Victoria House
37 Southampton Row
London, WC1B 4AD
United Kingdom

Oxford-Man Institute, University of Oxford ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
193
Abstract Views
1,371
rank
179,953
PlumX Metrics