Bank Pay Caps, Bank Risk, and Macroprudential Regulation
33 Pages Posted: 15 Jun 2013 Last revised: 26 Dec 2019
Date Written: December 13, 2013
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: Suggested Citation