A Theory of Bank Regulation and Management Compensation

Posted: 6 Mar 2001

See all articles by Kose John

Kose John

New York University (NYU) - Department of Finance

Anthony Saunders

New York University - Leonard N. Stern School of Business

Lemma W. Senbet

University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 4 versions of this paper

Abstract

We show that concentrating bank regulation on bank capital ratios may be ineffective in controlling risk-taking. We propose, instead, a more direct mechanism of influencing bank risk-taking incentives, in which the FDIC insurance premium scheme incorporates incentive features of top-management compensation. With this scheme, we show that bank owners choose an optimal management compensation structure that induces first-best value-maximizing investment choices by a bank's management. We explicitly characterize the parameters of the optimal management compensation structure and the fairly priced FDIC insurance premium, in the presence of a single or multiple sources of agency problems.

Keywords: Bank regulation, Capital regulation, FDIC insurance, Management compensation, Agency problems

JEL Classification: G21, G28, G34, J33

Suggested Citation

John, Kose and Saunders, Anthony and Senbet, Lemma W., A Theory of Bank Regulation and Management Compensation. Available at SSRN: https://ssrn.com/abstract=254917

Kose John (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Lemma W. Senbet

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2242 (Phone)
301-405-0359 (Fax)

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