Relative Performance, Banker Compensation, and Systemic Risk

47 Pages Posted: 20 Nov 2016 Last revised: 21 Mar 2017

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

José Correia Guedes

Catholic University of Portugal (UCP) - Faculty of Economic Science and Business Studies

Multiple version iconThere are 2 versions of this paper

Date Written: November 20, 2016

Abstract

This paper shows that in the presence of correlated investment opportunities across banks, risk sharing between bank shareholders and bank managers leads to compensation contracts that include relative performance evaluation and to investment decisions that are biased toward such correlated opportunities, thus creating systemic risk. We analyze various policy recommendations regarding bank managerial pay and show that shareholders optimally undo the intended risk-reducing effects of the policies, demonstrating their ineffectiveness in curbing systemic risk.

Keywords: Systemic risk, bank regulation, relative performance evaluation, optimal contracts

JEL Classification: G01, G21, G28

Suggested Citation

Albuquerque, Rui A. and Cabral, Luis M. B. and Correia Guedes, José, Relative Performance, Banker Compensation, and Systemic Risk (November 20, 2016). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 400/2017. Available at SSRN: https://ssrn.com/abstract=2872935 or http://dx.doi.org/10.2139/ssrn.2872935

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Luis M. B. Cabral

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

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

José Filipe Correia Guedes

Catholic University of Portugal (UCP) - Faculty of Economic Science and Business Studies ( email )

Lisboa, 1600
Portugal

Paper statistics

Downloads
151
Rank
157,132
Abstract Views
322