Excessive Leverage and Bankers’ Pay: Governance and Financial Stability Costs of a Symbiotic Relationship

46 Pages Posted: 23 Mar 2014 Last revised: 6 Mar 2015

See all articles by Emilios Avgouleas

Emilios Avgouleas

University of Edinburgh - School of Law

Jay Cullen

University of Sheffield - Law School

Date Written: March 22, 2014

Abstract

Debt has traditionally been viewed as an effective corporate governance tool. On the other hand, high leverage levels can lead to rapid expansion of the size of bank assets maximizing, in the short-to-medium term, banks return on equity. In the absence of regulatory controls on leverage, all it takes to assume excessive risks, even for benign bankers, is to imitate competitor business strategies. This form of herding can be motivated by compensation considerations or by career concerns. However, while bankers’ compensation has been a major factor behind bank short-termism, excessive leverage creates serious governance/agency costs even in the absence of compensation incentives. Therefore, a reasonably protective leverage ratio can prove an effective measure in containing rent seeking and smoothing up the leverage cycle to improve bank governance, prevent deep recessions, and safeguard financial stability.

Keywords: bank leverage, bankers' pay, agency costs, leverage ratios, bank capital

JEL Classification: G18, G21, G28, G38, K00

Suggested Citation

Avgouleas, Emilios and Cullen, Jay, Excessive Leverage and Bankers’ Pay: Governance and Financial Stability Costs of a Symbiotic Relationship (March 22, 2014). Columbia Journal of European Law, Vol. 21, No. 1, 2015. Available at SSRN: https://ssrn.com/abstract=2412869 or http://dx.doi.org/10.2139/ssrn.2412869

Emilios Avgouleas (Contact Author)

University of Edinburgh - School of Law ( email )

Old College
South Bridge
Edinburgh, EH8 9YL
United Kingdom

Jay Cullen

University of Sheffield - Law School ( email )

Sheffield
United Kingdom
+44 (0)114 222 6856 (Phone)

HOME PAGE: http://https://www.shef.ac.uk/law

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