Bonus Caps, Deferrals and Bankers' Risk-Taking
75 Pages Posted: 1 Oct 2019 Last revised: 24 Mar 2015
Date Written: June 17, 2016
Abstract
We derive a principal-agent model to analyze the effectiveness of bonus caps and deferrals in regulating banks’ risk-taking. We calibrate the model to a sample of large US banks on the eve of the Global Financial Crisis and run counterfactual analyses of the potential effects of the regulations. We find that the risk-reduction effect on the median bank is negligible as banks respond to the regulations by increasing the earnings sensitivity of bonuses. However, on a small number of banks with high bonus to salary ratios prior to 2008, the bonus cap has a sizeable risk reduction effect. In contrast, bonus deferrals have only negligible effects on all sample banks.
Keywords: banking, bonuses, regulation, compensation, Dodd-Frank Act
JEL Classification: G01, G21, G28, J33, M52
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Too Big to Fail after All These Years
By Donald P. Morgan and Kevin J. Stiroh
-
Bank Risk of Failure and the Too-Big-To-Fail Policy
By Huberto M. Ennis and H. S. Malek
-
How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important?
By Elijah Brewer and Julapa Jagtiani
-
How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important?
By Elijah Brewer and Julapa Jagtiani
-
How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important?
By Julapa Jagtiani and Elijah Brewer
-
‘Too Systemically Important to Fail’ in Banking
By Philip Molyneux, Klaus Schaeck, ...
-
'Too-Big-To-Fail' and its Impact on Safety Net Subsidies and Systemic Risk
By Klaus Schaeck, Tim Mi Zhou, ...
-
How Much Would Banks Be Willing to Pay to Become 'Too-Big-to-Fail' and to Capture Other Benefits
By Elijah Brewer and Julapa Jagtiani