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Incentive Pay and Bank Risk-Taking:Evidence from Austrian, German, and Swiss Banks

CEPR Discussion Paper No. DP10217

53 Pages Posted: 17 Nov 2014

See all articles by Matthias Efing

Matthias Efing

HEC Paris - Finance Department; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Patrick Kampkötter

University of Tuebingen - Department of Managerial Accounting

Johannes Steinbrecher

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Multiple version iconThere are 4 versions of this paper

Date Written: October 2014

Abstract

We use payroll data on 1.2 million bank employee years in the Austrian, German, and Swiss banking sector to identify incentive pay in the critical banking segments of treasury/capital market management and investment banking for 66 banks. We document an economically significant correlation of incentive pay with both the level and volatility of bank trading income particularly for the pre-crisis period 2003-7 for which incentive pay was strongest. This result is robust if we instrument the bonus share in the capital markets divisions with the strength of incentive pay in unrelated bank divisions like retail banking. Moreover, pre-crisis incentive pay appears too strong for an optimal trade-off between trading income and risk which maximizes the NPV of trading income.

Keywords: Bank Risk, Bonus Payments, Incentive Pay, Trading Income

JEL Classification: D22, G20, G21

Suggested Citation

Efing, Matthias and Hau, Harald and Kampkötter, Patrick and Steinbrecher, Johannes, Incentive Pay and Bank Risk-Taking:Evidence from Austrian, German, and Swiss Banks (October 2014). CEPR Discussion Paper No. DP10217, Available at SSRN: https://ssrn.com/abstract=2526325

Matthias Efing (Contact Author)

HEC Paris - Finance Department ( email )

France
(++33)695646755 (Phone)

HOME PAGE: http://matthiasefing.com/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Patrick Kampkötter

University of Tuebingen - Department of Managerial Accounting ( email )

Germany

Johannes Steinbrecher

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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